LMAT
#Thank you, Tiara.
Good afternoon, and thank you for joining us on our Q1 2017 conference call.
With me on today's call is our Chairman and CEO, <UNK> <UNK>.
Dave Roberts is unable to join us because he is available ---+ he is at a vascular conference in London.
Before we begin, I'll read our safe harbor statement.
Today, we will make some forward-looking statements, the accuracy of which is subject to risks and uncertainties.
Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.
Our forward-looking statements are based on our estimates and assumptions as of today, April 26, 2017, and should not be relied upon as representing our estimates or views on any subsequent date.
Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that could cause results to differ materially from those expressed or implied.
During this call, we will discuss non-GAAP financial measures, which include organic sales and growth numbers as well as EBITDA.
A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com.
I'll now turn the call over to <UNK> <UNK>.
Thanks, J.
J.
Q1 2017 was another strong quarter.
I'll focus on 3 items.
First, record sales of $24.1 million and 49% net income growth headlined the quarter.
Second, biologics, now 1/3 of our sales, continued to drive growth at <UNK>; and third, our business in the Americas has picked up momentum recently.
As to our first headline, Q1 sales increased 19% to a record $24.1 million.
Strong sales growth, an improved gross margin, and a low tax rate drove net income growth of 49% and EPS growth of 42%.
In fact, all three of our bottom line metrics in Q1 were our second best ever, op income of $4.2 million, net income of $3.2 million and EPS of $0.16.
We are very excited about passing the $100 million mark in sales in 2017.
will run through our guidance later in the call.
Turning to our second headline.
Biologics accounted for 33% of our sales in Q1, a high-water mark.
The XenoSure Patch grew 48% in Q1 as our 95 rep sales force continued to make market share gains.
We now have clearance to sell XenoSure in 71 countries, and we're pursuing applications in the large markets of China, Japan and Australia.
Our biologic growth extends beyond XenoSure.
Omniflow posted 21% sales growth in Q1 and this 2014 acquisition for our European sales force is now squarely in the win column.
Sales of our recently acquired RestoreFlow Allografts were strong in Q1 and the product has captured the interest of our domestic sales force.
Starting in April, RestoreFlow has been folded into our sales reps quota, which should help drive 2017 sales.
We also recently filed with Health Canada to begin providing RestoreFlow north of the border.
Results in these 3 implants further our confidence in the future role of biologics in vascular surgery.
Two weeks ago, we broke ground on a new biologic-only clean room in our Burlington headquarters.
As to our third headline, Q1 sales in the Americas were up 26%, following growth of 17% in Q4 2016 and 22% in Q3 2016.
XenoSure remains the primary driver, but Q1 growth was, once again, supplemented by AnastoClip, up 49% in the Americas and 43% worldwide, largely due to the recently introduced longer version.
There was no personnel turnover in the North American sales force in Q1.
This could be due to the continuing upgrade of our product portfolio as well as recent increases to our reps' W-2s.
, I want to remind you of <UNK> Vascular's financial objectives: 10% annual reported sales growth and 20% annual op income growth.
Thanks, <UNK>.
Our gross margin in Q1 2017 was 71.9%, a sequential increase of 240 basis points over Q4 2016.
The increase was driven by higher U.S. sales, where margins are comparatively higher; lower sales to China, where margins are comparatively lower; manufacturing efficiencies; and average selling price increases.
In order to further improve manufacturing efficiencies, we have started construction on a new 8,000 square-foot clean room, which will be used to manufacture our XenoSure and other biologic products.
Biologics now represent 33% of our worldwide sales, and we believe that the new clean room will enhance our biologic manufacturing competencies by lowering unit cost over time.
Q1 2017 operating income was $4.2 million, an increase of 27% versus Q1 2016.
The increase was driven by a 19% increase in sales as well as 100 basis point improvement in the gross margin.
The operating margin in the quarter was 17%.
We expect our operating margin to increase in Q2 2017 to 19% and then to 20% for the full year 2017.
Improving leverage in the back half of the year is a result of projected organic sales growth of 9% for the full year and a gross margin of 71.5% as well as cost containment in the second half.
Our effective tax rate in Q1 2017 was 24%, with the lower rate driven by increased employee stock option exercises.
Combined with a 27% increase in operating income, the reduced tax rate resulted in a $3.2 million of net income, a 49% year-over-year increase.
Earnings per share in the period were $0.16, a 42% increase.
Turning to guidance.
We expect Q2 2017 sales of $25.4 million, a reported increase of 13% and 10% organically.
We also expect a gross margin of 70% in the quarter, operating income of $4.8 million, an increase of 27%, and earnings per share of $0.17, an increase of 27%.
For the full year 2017, we have increased our guidance to $100.5 million, a reported increase of 13%, and 9% organically.
We also expect a gross margin of 71.5%; operating income of $20 million, an increase of 22%; and earnings per share of $0.70, an increase of 27%.
In closing, I would like to thank <UNK> <UNK> for recently initiating coverage on LMAT.
We know <UNK> from his <UNK> days and we look forward to working with him in the coming quarters again.
With that, I'll turn the call back over to the operator for questions.
Okay, great, <UNK>, thanks a lot.
That's a great question.
I would say, specifically, I don't think we're going to be guiding exactly on these devices.
I think we've been trying to look at this thing as a ---+ sort of a portfolio, but since it's a new acquisition, maybe we dig in a little bit more than usual.
So the short answer is it's going very well.
The sales force seems very excited about this device.
It's large enough that it has captured their attention.
And the results so far indicate it feels as though we're going to get something in the neighborhood of a 15% to 20% increase in sales, and you'll remember that we bought a $3.7 million business.
So I'd say pretty darn good.
We're pretty excited.
It's not yet in the win column, but pretty darn good.
Yes, yes, good question because there's a lot of movement there.
Sequentially, we were up 240 basis points and a decent amount of that improvement was due to improved mix, particularly sales in the U.S. where margins are comparatively higher versus sales in the ---+ outside the U.S. And additionally, less China sales quarter-to-quarter sequentially, again, may be adding 1% to the margin there because of that.
Manufacturing efficiencies are coming through also pretty nicely in the quarter.
And then average selling price increases as we get around the turn of the year.
So those were sort of the drivers, sequentially, a decent number of those also improving the margin year-over-year.
So it's kind of the same theme, which is an improved mix topic, an improved ASP topic and maybe an improved U.S./OU.
S.
geographic mix topic as well.
Looking forward to Q2, we're thinking we're going to downtick a little bit for the quarter but then rebound as the year goes on.
We're still guiding 71.5% for the full year.
But in Q2, in particular, there's more, I think, accounting issues more than anything else, some manufacturing inefficiencies from months gone by, 5, 6, 8 months gone by, coming off the balance sheet and onto the P&L sort of hampering the margin a little bit in Q2.
But again, recovery coming throughout the rest of the year as XenoSure continues to take up a bigger slice of the sales, and its margin improves, and we improve manufacturing efficiencies on the HYDRO and some other topics as well.
So good bounce back in the second half of the year we think.
Okay.
I mean, one thing to remember is that XenoSure means more in the U.S. than it does in Europe.
And we seem to have found pricing power in XenoSure in the U.S. whereas we don't quite have as much pricing power over in Europe, so that's a big thing.
Anytime you say the word XenoSure, it covers a lot.
It pulls out a lot for our company.
Also, we've had a nice run of the sales reps sticking around and not turning over like we've had historically.
We talked about the turnover before.
So we feel good about that.
And then, of course, we're up from ---+ I think, we're up 10% in terms of the size of the sales force over the last 12 or so months, so that's helping out as well.
The U.S. also has access to this AnastoClip device, which is not in Europe.
I mean, we have it in Europe, but it's so small that it's de minimis.
It's ---+ and that's been going very well, so you have a couple of big horses, XenoSure and AnastoClip in the U.S. and maybe you don't quite have that over in Europe.
Sure, sure.
So I'm going to talk in reported growth numbers rather than organic because I don't want to send our accountants scurrying around in the background here.
But on a reported basis, if you could stylize and say, Asia has gone extremely well for the last 4 or 5 quarters, 40s, 50s, 60s and 70s is growth.
And usually Europe has been sort of in the 12s and 14s.
This quarter, on a reported basis, Europe was only 3%, and a lot of that had to do with 2 things: one is we just had a bad export quarter, and normally it's a pretty big piece to our business.
We do all of our export largely out of our Frankfurt office, and we ---+ it's a very lumpy business and we didn't do too well this quarter.
I have no worries about it annually.
And then secondly, you lost a couple hundred thousand dollars because of the weakness of the British pound.
We usually don't have that problem.
And then on top of that you lost some money from the weakness of the euro versus the dollar year-over-year.
So I'd say those 3 things would point you towards in the quarter.
The reported number was 3% in Europe and normally we've become accustomed to that being sort of 12s and 14s, but again, Asia going great guns and I expect Europe to be just fine.
Okay.
I might punt the cost to J.
J.
in a second.
But I would say, philosophically, the good news here is that you see us raising our sales guidance and the XenoSure thing grew 48%.
Am I doing that right.
No, that's organic, excuse me.
The XenoSure grew 50% on a reported basis.
No, got it wrong, sorry.
48% reported growth in Q1 and <UNK>, obviously, when things grow that fast you got to do something because you run out of room in the clean room.
So we've taken what used to be the shipping department in Burlington, and we're building out 8,000 square feet of brand new clean room space, largely for XenoSure, but also for another biologic device, the ProCol device.
What we then did was, we took the shipping department and we rented a fourth building in Burlington.
So to summarize, we used to have 3 buildings in Burlington, we now have 4, and we did it because XenoSure is growing so fast.
Timing, I bet we're occupying and making human-use devices in Q3 of 2017.
, color on cost on that thing maybe.
<UNK>, I mean, in terms of the cost, it's kind of a short term, medium-term topic, in the short term when we turn on the depreciation for a larger room.
I think, you'll have a negative impact.
Over time, however, as units continue to ramp and the folks within that room can be more efficient because the layout is better and process flow of the raw materials is better, et cetera, et cetera, I think you're going to get some nice efficiencies.
So, in the medium term, I think it's going to be a nice win for the XenoSure margin.
In the short term it might hamper it a bit.
But certainly, the right move.
Yes, so interestingly, FX changed a little bit between last time and this time.
So there's an FX topic in there.
And on the bottom line, that actually increases our euro-based expenses as they get translated back into dollars.
So that $1.5 million in, say, increased sales, take that through gross margin and maybe you get $800,000 or $1 million of GP depending on the mix and maybe RestoreFlow is a little bit more of that mix so it's a little on the lower side, then you get the take out of that, sort of $800,000 or $900,000, that FX topic that I just touched on, maybe $250,000 or so for that.
And maybe purchase accounting for RestoreFlow was a little bit more than we thought when we spoke to you last time.
And the China trials, that we're getting XenoSure ramped up in terms of the entering into China.
That trial is really starting to kick in, I would say this month and next month.
And as we do more cases in that trial, we're obviously incurring more expenses and I think that's a little bit incremental to our last conversation.
So the investment spend piece, if you will, probably another $300,000 or $400,000 out of that whole $1.5 million topic and the rest being accounted for as I mentioned.
On the whole though, for the year, the op margin I'm getting to 20% up from 18% in the prior.
So sort of nice leverage still coming through on the bottom line.
We think growth of 22%, I think that is year-over-year.
So nice growth as well in excess of our 10, 20 mantra, if you will.
So even though we held it flat, I think it's still a nice answer for the year.
Okay, so I'd answer that.
There's 2 positives that I think that come out.
When these assets do get traded, they get more likely to even get traded again, that's always sort of been a truism that I've felt happens with acquisitions.
Therefore, as you're pointing out, for instance, with Bard getting sold, there's a Bard Vascular, maybe the owners of Bard are going to feel differently about certain pieces and maybe Dave can go off and buy those pieces.
And I think that's what you're getting at, so yes, we generally really like when we see these big trades happen.
Another thing we like about these big trades is we do feel like the vascular subsidiaries, which are usually small within these larger entities, get a little bit goofier and a little bit easier to compete against.
They stop product lines, they don't ---+ I think when Synovis was bought by Baxter, it was a good thing for <UNK> because they got a little bit less focused, and we were able to make incursions into the XenoSure market largely due to the fact that Baxter sort of forgot how to sell to vascular surgeons.
And Synovis was pretty good at doing that.
So 2 reasons why we like them.
So yes, we like them all.
One small add-on, I'd say, is what was the multiple here, 6x sales, 6.5x sales, something like that.
When those types of things happen, we feel like you get a markation or a valuation stamp, again, on vascular and medical device companies, so we like that, too.
Yes, yes so the raise in total of about $1.5 million, we beat by $600,000-or-so in Q1, so that's part of the answer there.
And then I had mentioned there's an FX piece, which doesn't touch the organic number.
And that was about $0.5 million.
So surprisingly, there's been a decent shift in the euro FX rate and some of the other FX rates.
So another $0.5 million there of revenue, but not a change to that [9]% organic number.
And then, I think, RestoreFlow has probably got a little bit better outlook going forward than maybe we were thinking last time, and so there's a nice piece of that in there.
And of course, XenoSure continues to surprise on the upside, maybe and do well, and so there's a piece of that in there.
So I would say sort of nice growth from the acquired revenues of XenoSure and some of the organic pieces as well.
But those are the (multiple speakers).
Sure.
I think we're in the second or third inning of that rollout.
And the reason I think that is that we're fighting with one hand tied behind our back.
We don't have that long AnastoClip in the grip clip version approved for Dura, <UNK>.
And that's really what the surgeons and the sales reps are clamoring for.
They don't ---+ they specifically want the A clip, they want the G clip, and I know that's a detail, but the G clip bites, and it's more grippier.
That's why it's called G clip as opposed to A clip.
And so when that comes on, and we don't know what that comes but we've started an animal trial to get that approved.
When that comes on, I think you'll be fighting with both hands and that makes me think you're in the second or third inning.
Yes, sure, <UNK>.
Stock comp, about $500,000 in the quarter and CapEx about $1.7 million.
And just, <UNK>, just a little ---+ <UNK>, sorry to interrupt you.
On that $1.7 million, that's high for us.
Typically we're in the $2 million, $2.5 million range a year when we talk about the clean room build outs, and I think that's a decent part of that $1.7 million that we're talking about in Q1.
I mean, if you get to low 30s for the full year, do something, that might be sort of a place to shoot for.
But in the back half, I think you're in the mid-30s, low, mid-30s.
Yes, yes.
It's been larger in every single quarter since Q3 of 2016.
Do you mind if I quibble with the verb milked.
I'm kind of just having fun there, <UNK>.
But no, we feel good about the device.
And we've told you guys a lot over the years the units are generally flat, and we have price increases.
And I would say it's business as usual with the valvulotome this year.
Though in Q1, we were comping against a high Q1 the year before, and so there wasn't much growth.
I think it was exactly flat on a revenue basis in Q1.
But we feel as though it will be a normal valvulotome year.
We do feel as though we are getting the nice price hike that we put in.
So I would say business as usual with the valvulotome.
Although in Q1, you had a flat Q-over-Q.
Gosh, I hope we didn't give anyone the impression that we thought something was or wasn't going to happen.
I generally feel as though the pipeline is what it is.
There's plenty of things to buy in this space.
But we would definitely never predict 1 or 2 happening in such and such a time frame.
I think that hasn't served us well.
.
Yes, I think it looks excellent always.
And I'll tell you as we get bigger, the pipeline gets bigger because we have more things that are smaller than us that we could potentially buy.
That all being said, I think one of the watch words recently, and maybe this is a small shift in our M&A expectations, is that we bought so many of these smaller companies in the last 5 years.
We bought 8 companies since 2012.
I think they've been a little bit smaller than maybe they should have been and I think when we put a big piece of product in front of the reps, a la RestoreFlow, they react really well.
And when we put a small piece, like the angioscope, in front of the reps, they don't get that interested.
There's not that much in it for each of them.
So I think our mindset is drifting upwards in terms of size.
No more small ones and maybe hold off on those and wait until we get a bigger deal.
Sure.
So I would say the XenoSure progress in R&D that we made, the patches, you mentioned the pledget.
No, nothing special, nothing material there.
The growth in XenoSure is about the original device.
So for better for worse, it's just doing all this by itself, and we haven't helped much with these 2 R&D projects.
That's one.
Omniflow, no, also the same answer.
We had a fantastic Omniflow Q1, we were up 21%.
No help at all from that 7-millimeter device that we launched.
It'll happen.
But these are long things.
And then I would say, the place where you're getting a nice kick is ---+ and we mentioned this before, is that long AnastoClip.
And again, it's only AC and we still have the GC long to give at some point when we get it through the animal trial.
You mean the reported sales growth, $11.3 million between last year and this year.
Is that.
.
I think, we're still not guiding on individual products, and we're trying as hard as we can to coach you guys into looking at this as a mutual fund.
That being said, of course, we realize the importance of XenoSure.
So, I would say the number we wanted to give out this time, which we're giving out now is that the sales were $5.22 million for XenoSure in the quarter and again, we mentioned before that was a 48% reported up, and you guys will have to work on your math as you see what happens this year.
The number, the base number in 2016, the final number was $18.1 million in sales for XenoSure.
I hope you can put that Rubik's Cube back together.
It's really hard, <UNK>.
And I'd say, Q3 is particularly confounding, is probably a good word, because of all the extra sales we made due to the back order from Baxter in Q3 of 2016.
Yes, okay, so the China trial, and I would always ---+ when I refer to these Asian trials, I just kind of have to use the word molasses.
It's molasses.
It's a very long one.
The end date is 2020 or 2021, something like that.
And we have not put our first implants in.
We had thought we would have put our first implant in by this phone call, we have not.
The current guidance from my regulatory staff is we'll put 1 in, in China at least in May, so the beginning of that.
And we hope to do 75 cases of the 225 ---+ I might be getting that number wrong ---+ 280, excuse me.
We hope to do 75 cases this year.
There's your Chinese answer.
As it relates to the HYDRO and the recalls, I think the good news is that the recalls on the HYDROs are all over, they're all mopped up.
You had a very large sales number in Q3 because of this.
You had a small number in Q for sales, you had a small number in Q4 because of this and you're now back to square one with normal results in Q1.
And I would say it's business as usual in valvulotomes in Q1 and then going forward.
Just because the recalls are over doesn't mean we don't have some small quality issues to mop up with the valvulotome.
But I would say the lion's share, the biggie issues are behind us.
Well, it's a good question.
I think largely speaking, it is and one way I try to look at this has been, we were making all these great market share gains before that thing, and I think the proposition of our vascular-centric sales force continues to be what's really driving all this and we happen to be in the right place at the right time.
So I think you're up and running and you're not going to lose these customers, though you know maybe someone wants to go back to Baxter at some point, again, but we feel comfortable that it's just business as usual in our XenoSure segment.
A little bit of that, <UNK>.
Sales up $1.5 million maybe GP up $850,000-or so.
FX is going against you now since the last time we spoke on expenses.
Euro-based expense is now coming back higher, maybe $250,000 for that.
And I think purchase accounting is probably a little bit higher than we thought the last time we spoke with you.
So most of that accounted for with those concepts and then maybe a little bit more of investment spend.
So we've kept it unchanged.
And as I said earlier, you're still up to a 20% op margin in the year versus 18% in the prior year and year-over-year, the growth is 22%, so we think it's still a nice number.
So you saw my guidance.
It was unchanged on the gross margin lines at 71.5% for the full year.
I'm going to guess, yes, it's going to negatively impact us when we immediately turn on the new clean room.
But there's some other good things happening to counterbalance that.
So I'm going to say improvement sort of in the second half from the 70% in Q2.
But yes, when you first turn on the new clean room, you get the depreciation right away.
And then when you get folks in there in a new environment, maybe it takes a little while to get up to speed and get a little bit more efficient.
Maybe there's some training stuff that goes right through to the P&L as they get acclimated to the new space.
But I think fairly soon after that, they'll be operating more efficiently than they were in the current clean room, which is designed less efficiently than the new one is.
