LeMaitre Vascular, Inc.
Q4 2008 Earnings Call Transcript

Published: 4 Mar 2009

[Operator:]

Welcome to LeMaitre Vascular fourth quarter 2008 financial results conference call. At this time, I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

[J.J. Pellegrino:]

Thank you, Stacy. Good afternoon and thank you for joining us for our Q4 2008 conference call. Joining me on today’s call is our Chairman and CEO, George LeMaitre, and our President, Dave Roberts. Due to yesterday’s snowstorm, George’s fight was cancelled and he will take this call from the west coast. We apologize for any technical glitches this might cause. Also, before we begin, I would like to read our Safe Harbor statement. Certain statements contained in this conference call may be considered forward looking as defined by the Private Securities Litigation Reform Act of 1995, in particular, any statements we make about our expectations for future financial, clinical, and operational performance. Our forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. These statements involve various risks and uncertainties that could cause our actual results to differ from those expressed in such forward-looking statements. These risks and uncertainties include risks related to product demand and market acceptance; the significant competition we face from other companies; technologies and alternative medical procedures; our ability to expand our product offerings through internal development or acquisitions; our ability to recognize the anticipated benefits of our acquisitions; disruption at any of our manufacturing facilities; general uncertainty related to seeking regulator approvals for our products, particularly in the United States; potential claims of third parties that our products may infringe their intellectual property rights; and the risks and uncertainties included under the heading Risk Factors in our most recent annual report on Form 10-K, and other periodic filings with the SEC and available on our investor relations website at www.lemaitre.com, and on the SEC's website at www.sec.gov. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will be achieved. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, March 3, 2009, only. We do not undertake any obligation to revise or update publicly any forward-looking statements expressed on today's conference call. I will now turn the call over to George LeMaitre.

[George LeMaitre:]

Thanks, J.J. I will start by reviewing some Q4 highlights. Dave will then provide a business development update and J.J. will conclude with our financial results. From my perspective here, the four headlines for this call

[Dave Roberts:]

Thanks, George. I am pleased to report that last night LeMaitre Vascular signed an agreement with Edwards Lifesciences to terminate their distribution of Albograft. This termination is scheduled to become effective March 27, 2009, and is subject to customary closing conditions. Since our December 2007 acquisition of Biomateriali, Edwards has held the exclusive distribution rights in Europe and select international markets. These rights were scheduled to continue through December 31, 2011. Under terms of this new agreement, LeMaitre Vascular will pay Edwards €2.25 million for the termination of this contract and approximately €400,000 to repurchase inventory. Edwards will provide detailed customer information as well as transition services with respect to items such as sub distributors, order forwarding and tender transfers. Preliminarily we estimate one-time charges associated with this transactions of up to €2.25 million in Q1 2009. We expect this transition will add incremental revenue of approximately €300,000 in 2009 and €1 million in 2010, all of which should drop to the gross margin line and most of which should drop to the operating income line. As other recent distribution terminations have shown us, particularly our Italian transition, transferring a business takes time. We will be finalizing the accounting treatment over the coming weeks and subsequent to the transaction closing we will update our 2009 guidance. Both Edwards and LeMaitre are currently bound by confidential and I hope you understand that there are questions beyond the scope of what I can answer today. At a higher level, this transaction enables us to add Albograft to our direct to hospital sales bag. Polyester grafts continue to be an essential implant in vascular surgery. We believe the combination of the LeMaitre Vascular brand and these high-quality implants will enable us to gain share in this $150 million to $200 million market. Albograft complements suite of devices, particularly our fast-growing aortic stent-grafts. Next, I would like to comment on our Neovasc transaction. On December 30, LeMaitre Vascular signed an agreement with Neovasc to distribute their biological patches for use in vascular surgery. This agreement which became effective on January 26 grants us exclusive distribution rights in the United States and the EU through 2016. Neovasc received FDA approval in 2004 and subsequently sold this bovine pericardial patch through independent distributors. We expect our revenue from this product to be approximately $400,000 in 2009, and will carry standard distributor gross margins. Starting in 2014, LeMaitre Vascular has an option to acquire this product line. We did not pay any upfront consideration for either the distribution contract or the purchase option. We believe there to be substantial sales synergies begin Neovasc’s carotid patch and our Pruitt-Inahara Carotid Shunt. These are the two principal devices that a vascular surgery needs at the ready when performing a carotid endarterectomy. With that I will turn it over to J.J. Pellegrino, our Chief Financial Officer.

[J.J. Pellegrino:]

Thanks, Dave. I will now add some detail on our Q4 operating results and will conclude with our 2009 guidance. Q4 revenues were $12.1 million, a 9% increase over the Q4 2007. Revenue gains were driven by the inclusion of the Albograft acquired in December of 2007, strong results from our TAArget and UniFit stent grafts and remote endarterectomy devices as well as solid sales gains in Italy, France and the UK. I will now break down the 9% increase in a couple of different ways. First by category, endovascular grew 6%, vascular grew 12%, and general surgery decreased 1%. Endovascular was driven by strong TAArget and UniFit stent graft gains although the weak euro offset much of this growth in Q4. Vascular benefited from the inclusion of the Albograft and strong results from our remote endarterectomy devices. International business drove the top line in Q4 2008 according to 44% of sales. On an apples-to-apples basis, organic sales growth was 11%. The Biomateriali acquisition contributed 2% and the weak euro reduced sales by 4%. In other words, 11% percent organic plus 2% acquired plus 4% FX resulted in 9% reported sales growth for the quarter. In fact, all told, the declining euro negatively impacted sales by approximately $450,000 in the quarter. Of note, our Q4 organic sales growth of 11% compared favorably to previous 2008 quarterly organic growth rate of 2%, 7% and 7% in Q1, Q2 and Q3 respectively. The company reported a gross margin of 69.6% in Q4 of 2008 up from 67.4% in Q3 2008. The Q4 improvement was due mainly to manufacturing efficiencies as well as reduced inventory write downs. The 2008 expense sheet continues to keep operating expenses in check and allowed us to enjoy SG&A leverage in Q4. Sales and marketing expenses decreased 17% to $4.4 million in Q4 2008 from $5.3 million in Q4 2007. Sales and marketing expenses were 36% of revenue in Q4 of 2008 compared to 48% of revenue in the year earlier quarter. The company ended Q4 2008 with 52 sales representatives. General and administrative expenses decreased 13% to $2.3 million in Q4 2008, the result of general belt tightening. R&D expenses increased 11% to 1.3 million in Q4 2008 as the company continued to invest in clinical and regulatory personal as well as product development. Q4 2008 operating income was $354,000 versus a loss of $1.3 million in Q4 2007. This improvement was due largely to solid sales as well as 2008 expense sheet program. In deed, total operating expenses fell 15% from 9.5 million in Q4 2007 to 8.1 million in Q4 2008. The $354,000 Q4 operating profit extended the 2008 bottom line turnaround comparing favorably with our Q1 operating loss of 2.6 million to Q2 operating loss of $869,000 and a Q3 operating profit of $170,000. The company reported net income of $312,000 in Q4 2008 or $0.02 per diluted share versus a net loss of $1.2 million or negative $0.08 per diluted share in Q4 2007. The company's cash and marketable securities increased by $2.1 million during Q4 2008 to $21.3 million. This increase was driven principally by net income of $312,000, depreciation, amortization and stock-based compensation of $566,000, as well as a $1.1 million inventory reduction. The substantial cash addition in the quarter compared nicely with Q3 and Q2 when cash increased by $892,000 and $469,000 respectively. Before getting to our full-year guidance, let me first make a comment about Q1. Due to the weak euro, the near-term top line implications of the Edwards transaction, and the effects of any possible Albograft inventory returns, it is likely that Q1 2009 sales will be down sequentially from Q4 2008. And as for our guidance for 2009, the company expects sales of $50.0 million to $50.5 million and operating income of $1.5 million. Excluding foreign exchange and acquisitions, this sales guidance implies year over year growth of 8% to 9% in 2009. This top and bottom line guidance also excludes the impact of the Edwards distribution termination. The company will update its 2009 guidance to reflect the impact of this transaction after the closing. With that I will turn it back over to the operator for Q&A.

[Operator:]

Thank you. (Operator instructions) Your first question is from the line of Larry Haimovitch with HMTC. Please proceed.

[Larry Haimovitch:]

Good afternoon, gentlemen.

[George LeMaitre:]

Hi, Larry.

[Larry Haimovitch:]

Congrats on the quarter, I'm feeling pretty good about it particularly given the environment we're in right now. I had a couple of questions, one was on the income statement, I don't know whether Dave or J.J. or you George want to take it, it doesn’t matter, what struck me about Q4 obviously besides the fact you made a nice operating profit which is lovely, the sales and marketing expenses were down significantly although sales were up a little bit and I'm wondering and you said your headcount and salesmen was up, so did you cut marketing expenses or what happened in the quarter that the sales and marketing expenses were down particularly in light of higher sales?

[George LeMaitre:]

Larry, you may have heard it wrong. We had 57 sales reps in the wake of the Vascular Architects acquisition in Q4 07 and we had 52 sales reps in Q4 08.

[Larry Haimovitch:]

I did, I misread that. Okay, thanks for clarifying that. But would that still account I guess I'll ask George the answer, George, does that still account for about $900,000 drop in sales and marketing?

[George LeMaitre:]

I mean I'm glad you're noticing that. I think this is just I hope you're seeing the impact of what we did. We really took a lot of cost out, you can hear these five sales rep we are hearing about, you're not seeing the couple of regional managers that aren’t there any more from 2007 to 2008. And yes, there was some good – marketing took its share of the cut, so it was a pretty full rounded – 20% of the employees are gone from 2007 to 2008.

[Larry Haimovitch:]

When we see marketing expenses cut, you always worry about whether there is a long-term impact on the brand image and stuff like that and sales obviously are more directed to the sales line but marketing is more of a long-term thing. Are you comfortable that you haven't taken cuts so deeply into the fat that it may be cutting through some bone or muscle?

[George LeMaitre:]

Well one of the fact – and it is a good thought and certainly something people with often. One of the thoughts – one of the ways I would answer that was in Q1, Q2, Q3 and Q4, our stripped organic growth rate was I think if I'm quoting correctly 2% in Q1, 7% in Q2, 7% in Q3 and then 11% in Q4. So there is some indication that may be we are cutting correctly and maybe we're avoiding cutting into bone.

[Larry Haimovitch:]

Yes, that is a fair answer. Thanks, George. And then there was a comment made, I don’t know if I caught it exactly, but that Europe was particularly strong and I think Dave or George you may have commented that the stent graft business was particularly strong and I wanted to just get a little more color on that if I could?

[George LeMaitre:]

Sure. I mean I will take a shot at this and one of the guys back in Boston perhaps [ph] will comment on it. Larry, the big move I think that we have made over there is A, the sales force in Europe versus the sales force in the United States is a little bit beefed up, so we have had sort of real muted growth if not a little bit of down on the US site, but on the European side we do have the full complement of reps. I think we have 24 trips outside the United States. We are something like 26 in the United States. So it should balance the 52, so that is up a little bit in Europe. But what we did really specifically regarding the stent graft is, we want a brand new introducer in November of 2007. I think you might remember a couple of phone calls in Q1 and Q2 of 2008, we sort of brought the thing back into the shop, did a couple tweaks, and I would say the real launch took place in kind of the back of 2008 and you can see them getting fantastic momentum in Q4 2008, despite the weak euro, we had a record dollar amount quarter rather in Q4 with the stent graft.

[Larry Haimovitch:]

Yes.

[George LeMaitre:]

So it is definitely coming along with the stent graft, it feels that way.

[Larry Haimovitch:]

And also if I recall, I will jump back in queue, I shouldn’t clog this too much, but just one more quick question that is, on the stent graft side, I think you distribute the Endologix stent graft overseas, don't you?

[George LeMaitre:]

That is correct.

[Larry Haimovitch:]

And any comments on that, was that part of the strong growth as well, or is it more the direct products that you have under your own brand name?

[George LeMaitre:]

Let me take two shots at that. One is on a year basis, I think the number is and I'm happy to be corrected by the folks in Burlington. I don’t have the numbers in front of me. I think on a yearly basis, the answer was – it was really strong for UniFit and TAArget and that outshined the growth that was going on in the Endologix line but in terms of in Q4 I think the Endologix line did participate in that growth.

[Larry Haimovitch:]

Okay, great. Thanks a lot.

[Operator:]

(Operator instructions) Your next question comes from line of Jeremy Green with Redmile Group. Please proceed.

[Jeremy Green:]

Hi, guys. Congrats on the quarter. Better be careful with cash generation, you might have negative equity values.

[George LeMaitre:]

Thanks for that kind of compliment, Jeremy.

[Jeremy Green:]

Not at all. Seriously nice job, especially in these times. Just a quick question on the Edwards deal, which that looks like a particularly good step forward, can you just run through those numbers again, I didn't quite hear them?

[Dave Roberts:]

Sure, I will run through it, Jeremy. This is Dave. Again we are paying Edwards €2.25 million for the termination. And then there's also an inventory repurchase which we are estimating at approximately €400,000, all right. And then what we just described was in 2009, we think that that transaction will generate incremental sales of €300,000 but that also will all drop to the gross profit line and almost entirely drop to the operating profit line. And then in 2010, this transaction ought to generate an incremental €1 million of sales and then also will all drop to the gross profit line and almost entirely drop to the operating profit line as well.

[Jeremy Green:]

So I mean this is basically almost accretive in year one and highly accretive in year two?

[Dave Roberts:]

Yes. I mean I would caution Jeremy just there is the charge coming for the €2.25 million payment. So if you are saying ex that charge, year one does look good but there's some work, you are going to see that, and we are going to feel that in the income statement.

[Jeremy Green:]

No, I applaud the conservative comments about the reported number, but just from a cash point a few, it’s obviously a pretty good deal for you guys, and yes, it gives you control of your destiny there as well.

[Dave Roberts:]

Most importantly.

[Jeremy Green:]

Ex that one particular transaction, can you just shed some light on what you think cash aggression will be this year and then that 1.5 million of operating profit guidance you are guiding to, can you give some sense of how that will change with Edwards? I mean I realize it hasn’t closed yet, but you are guiding that 1Q will be sequentially down? It would seem in your normal conservative nature to for that number to change usually on a big 1Q surprise?

[George LeMaitre:]

Jeremy, I'll take the first part anyway on the cash generation. If we are guiding 1.5 million up income or so and you assume over a little over 2 million or 2.2 million of non-cash add backs per year, you can kind of put together, may be a conservative number on capital expenditures given the environment, half of those sort of non-cash add backs and get to a cash flow number for the year. So I think something along those lines. That excludes any working capital changes of course. You have seen us decrease inventory pretty significantly over the last 9, 12 months down to the high $6 million, $7 million range. If it further decreases from here incrementally, I think it will be tough although achievable, so you might assume that working capital gains from here on probably are minimal.

[Jeremy Green:]

Right, okay. That makes sense, thank you.

[Operator:]

(Operator instructions) With no further questions in the queue, I would like to turn the call back to Mr. George LeMaitre for closing remarks.

[George LeMaitre:]

Okay. Thank you very much, Stacey, and I would like to thank everyone for joining us. To sign off, we look forward to our next call together, and I think that is in April. Thank you.

[Operator:]

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.