LeMaitre Vascular - Earnings Call - Q1 2020

Transcript

Speaker 0

Welcome to the LeMaitre Vascular Q1 twenty twenty 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.

Speaker 1

Thank you, Chris. Good afternoon, and thank you for joining us on our Q1 twenty twenty conference call. With me on today's call are our Chairman and CEO, George LeMaitre and our President, Dave Roberts. For your information, due to social distancing, we are holding this call from our respective homes, so we apologize for any audio difficulties. Before we begin, I'll read our safe harbor statement.

Today, we may make some forward looking statements within the meaning of The U. S. Private Securities Litigation Reform Act of 1995, 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, and believe, expect, anticipate, pursue, forecast, and similar expressions. Notably, on April 13, we withdrew our 2020 guidance, which we issued on February 6.

Please refer to the cautionary statement regarding forward looking information and the risk factors in our most recent 10 ks and the subsequent SEC filings, including disclosure on factors that could cause results to differ materially from those expressed or implied. During this call, we might discuss non GAAP financial measures, which may include organic sales growth numbers as well as adjusted operating income growth, operating income excluding certain onetime gains and charges and EBITDA. A reconciliation of GAAP to non GAAP measures discussed in this call, if any, 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 George Lemaitre.

Speaker 2

Thanks, JJ. Today's prepared remarks will address four aspects of the current crisis. Number one, LeMaitre's social distancing and work rules driven by COVID nineteen. Number two, the operational impact of COVID nineteen. Number three, the sales impact of COVID nineteen.

And finally, number four, LeMaitre's financial response to COVID nineteen. After the prepared remarks, we'll open it up for questions. Today's call will not include Q2 or twenty twenty financial guidance. As for the first section, social distancing and work rules, in early March, we instituted social distancing measures at all of our offices and factories. All employees whose jobs can be done remotely were told to do so.

We also transitioned production in our larger clean rooms to two shifts to reduce employee density. Our internal rules now forbid airline travel and sales rep hospital visits. Though we have been making case by case sales rep exceptions as some states and countries open up. As is widely reported, most hospitals are not currently accepting visitors. The second segment would be the operational impacts of COVID nineteen.

We began the crisis with $41,000,000 of inventory, equating to twelve months on hand, and all four Lemaitre factories are generally operating at near normal production capacity. But there are a few items worth discussing. As of this conference call, four of our employees are known to have tested positive for COVID nineteen, the last of which was discovered April 22. Our response has been to temporarily shut our clean rooms and to reopen after thoroughly disinfecting. Our main Burlington cleanroom has been closed for a total of nine working days since the crisis began.

Also, recently, we experienced somewhat elevated absenteeism in our main Burlington cleanroom, likely due to the high levels of COVID nineteen in Massachusetts and our employees' understandable desire to stay at home. Including the government's family first sick leave entitlement, our American employees can get up to seventeen days sick time off with full or partial pay. We also plan to reduce production hours by seventeen excuse me, 70% in our French factory based on the availability of a government furlough program there. We can reverse this at our election. So far, we've experienced no material COVID driven supplier disruptions.

Though we are monitoring the well chronicled situation at American abattoirs and acknowledge this as a potential supply risk for three products, XenoSure bovine patches, ProCol bovine grafts, and AlboGraft. Our CardioCel bovine patches sourced from Australian abattoirs where COVID nineteen has had less impact. So far, we've experienced no COVID nineteen related supply issues from the four abattoirs we work with in The US, New Zealand, and Australia. Additionally, we've had almost no logistical interruptions in getting our products from our four factories to our nine warehouses and then onto our customer shelves. Orders continue to leave our shipping docks daily, and cargo shipments to Europe and Asia continue to fly.

The rise of European country border checkpoints has also not materially impacted our delivery to hospital customers from our Frankfurt warehouse. The third section I'd like to discuss is sales and financial impact of COVID-nineteen on LeMaitre Vascular. All things considered, Q1 was a nice sales quarter. The Americas were up 12%, EMEA up 3%, and APAC was down 11%. However, beginning in mid March, we began to experience significant revenue disruptions, which seemed to impact Southern Europe the quickest and the most.

Our Italian sales were down 14% in Q1, and France was down 10%. Of course, we experienced revenue issues in China throughout Q1 with sales down 70%, but China accounts for only 1% of our sales. In total, we estimate a Q1 sales loss of between $500,000 and $1,000,000 due to the COVID-nineteen crisis. We generally sell our devices into the countries of the G20, and at this date, most hospitals continue to focus on the COVID-nineteen crisis, deferring elective surgeries. Also, vascular patients are older than 60, and it stands to reason that they will hesitate to enter hospitals in the very short term.

But in the long term, we expect the lion's share of our procedures will return to the hospital someday, and most will return to get done. You can't put off forever an in situ bypass or a surgical graft to save your foot, and you will eventually need to have your carotid endarterectimized and patched to possibly avoid a future stroke. When this happens and when countries and states decide to open up are quite unclear. Finally, the fourth section I'd like to discuss is LeMaitre's financial response to COVID-nineteen. In response to the sales declines that we've already experienced, as well as anticipated future sales declines, we implemented two cost cutting measures.

The first of these was a reduction in force. On April 14, we initiated a 51 employee RIF, which was a direct response to COVID nineteen. We had previously completed a 33 employee RIF in February 2020 as a more generalized belt tightening. When these two RIFs are fully implemented, we expect our total headcount will be down by 84 or approximately 18% to 375 employees. Notably, our sales rep head count was cut by 26% or 29 reps, bringing us down to 83 reps when the RIF is fully implemented.

The second measure was salary reductions. We have temporarily reduced base salaries through the 2020 for all employees earning over $40,000 a year. Cuts were cuts were progressive, ranging from 90% for me to 50% for Dave and JJ, and then down to 12.5% for lower paid employees. Employees earning less than 40,000 did not receive salary reductions, though their hours were cut 10% in the transition to two shifts and six day work weeks. Salary reductions had to be different overseas due to local laws and government programs.

We expect the net savings from all of these cuts should total approximately 13,500,000.0 in 2020, which is about 14% of our total twenty nineteen spending. That would include op expenses as well as cost of goods sold expenses. We could also look at these cuts as 12% of our 2019 sales. There will be a natural activity based decline in 2020 op expenses due to decreases in executive travel, trade show booths, sales rep T and E, and the like. We have not yet been able to quantify these savings.

At March 31, LeMaitre had $30,600,000 of cash and no debt. We expect that our strong balance sheet and continuing commitment to profitability should position us to withstand the economic effects of the COVID-nineteen crisis. With that, we'll ask Chris to open the call up to questions.

Speaker 0

Thank you. And our first question comes from the line of Jim Sidoti with Sidoti and Company. Your line is now open.

Speaker 3

Good afternoon. Can you all hear me?

Speaker 1

Yes, very well, Jim.

Speaker 3

Great. So the the reduction in in force, are are these employees considered furlough, and and can they be called back when, procedure is resumed?

Speaker 2

No. This was a this was a true layoff, if you will.

Speaker 3

Okay. So you'll have to hire these people back, you know, when when demand gets back to a more historical rate.

Speaker 2

That's right, Jim. That's how we saw it. Alright.

Speaker 3

And before this all started, you had had plans to consolidate a couple product lines into your facility up in Massachusetts. Is that still going on?

Speaker 2

Yes. So the one big one was the closure of the Australian factory in Melbourne. And that's still going exactly according to plan. That facility will be closed in late May, early June. And we will be building product human use in Q3.

So that's a big one. The other, not to confuse everyone, but the other Australian product, which is we're buying from a company in Perth right now, we're transitioning the manufacturing of that. It's called CardioCel. And we bought the Admitus brand. That's transitioning to Burlington, Massachusetts.

Jim, that's been slowed down a little bit because we can't build our clean room in Massachusetts because construction is not able to be done. Of course, the Minister of Governor signal's all clear, we will keep building the clean room and we'll continue with that transition. There's a third transition you might be talking about also, is the Syntel and Python product lines coming from California to Burlington. They were part of that Applied Medical acquisition that we did a couple years ago. And that is definitely still on course.

We will be finished with that transition in Q2 or Q3 of this year.

Speaker 3

And then I'm sorry, can you repeat the comment you made about 12% sales reduction? Was that related to the sales force?

Speaker 2

Yeah. So you know what? We were trying to find a way, of course, since we can't give guidance, we're trying to give you a sizing on this cost cut. So the cost cut's 13,500,000.0. And if you wanted to look at it as a percent of 2019 sales, it's a strange metric I'll give you, Jim, but that's what we got, which is it's 12% of our sales in 2019.

If you wanted to look at it as a percentage of our total total spending in 2019, it's 14%.

Speaker 3

Okay. Alright. I I I understand now. And are there any of these procedures that you perform where you think, the patients won't have to come back at some point?

Speaker 2

No. We I hate to be pithy about this, but we don't see this like a haircut where, you know, you skip a bunch of haircuts and then you have the haircut after COVID. We we think these are gonna have to come back. So in general, they're gonna have to come back. So to be done at some point.

Speaker 3

You know, I I know you can't predict your timing. Nothing nobody can. But at some point over the next twelve months, hospitals are gonna wanna do procedures because they're losing money. There's no reason to think that this business won't be won't be there, you know, some at some point, maybe late two thousand twenty or early two thousand or in 2021 at some point.

Speaker 2

Yeah, Jim. In fact, one of the things I've discovered, we're all learning these, we're all bumping into these new aspects of the crisis, but on this point, I realized, that the doctors really want to get back to work regardless of what's going on. They have a need to work. They like to work. They want to be in hospitals working.

So I think there's going to be a lot of actors driving things back to normality in the hospitals as the COVID-nineteen patients are dealt with. So, yes, I agree with you.

Speaker 3

Sorry. And the last one for me is when you start to see that, how quickly do you think you can, can we hire the sales folks? Because it sounds like you're going to need them.

Speaker 2

Well, that's I mean, that's a very long way away. So I think what we were thinking about right now is just get through this quarter. Things are kinda coming at us in a rush. So yeah, it may be something we do. It may not be something we do.

I will say that in this RIF, we haven't withdrawn ourselves out of territories. We still have a bunch of American reps, a bunch of European reps, and a bunch of Asia Pac reps. So we gone away from territories. They're just more thinly covered for now. So we'll see how that goes, and then we'll respond opportunistically.

Speaker 3

All right, thank you.

Speaker 2

Thanks a lot, Jim.

Speaker 0

Thank you. Thank you. And our next question comes from the line of Jason Mills with Canaccord Genuity. Your line is now open.

Speaker 4

Hi, this is actually Cecilia on for Jason. George, I was wondering if you could just provide a little bit of color kind of what you've seen from a procedure standpoint mid March in The US and how it's kind of trended through March and now in April and how centers are looking at May, June, kind of any insight you have just in terms of outreach for more products, if you're kind of seeing, any form of kind of, trend back to scheduling procedures.

Speaker 2

Right. You know, Cecilia, we debated a lot whether to get into the whole April thing or not because we've started seeing what April's like, and we really felt like it's not appropriate to dig into April. So if you look March, what happened in procedures, I mean, I don't I'm not distinguishing much between procedures and revenues, but there definitely you definitely felt it in the last two weeks of March. There was it was fairly obvious when it started happening. And it happened in China the whole quarter.

And then in Italy, we kept being surprised. We kept reading stuff in the newspapers and nothing bad was happening. And then all of a sudden in the March it started happening. So procedure volume was clearly dropping in Italy, France, to a certain extent, Spain, and then also The U. S.

Speaker 4

Okay. Thank you. That's helpful. And I guess just as a follow-up to, kind of looking back pre COVID times, but I was curious if you could provide some color just with Vascucel now in the sales bag, what you were seeing just from a competitive standpoint, being able to go up against some of the other products, just in your early days with that product?

Speaker 2

Sure. So it's always hard to tell you how these acquisitions are doing against, what we had initially thought, but maybe I'll have Dave take that.

Speaker 5

Yeah. Hi, Cecilia. It's a

Speaker 3

good

Speaker 5

question. We actually, from a competitive standpoint, I think, the CardioCel product, and I'll lump VascuCel in there, is, is beating our expectations. As you know, in q four, we did a little bit better than expected. So we increased the full year guidance for, CardioCel and VascuCel, to 7,100,000 And then in Q1, we registered a 1,900,000.0 in sales of CardioCel and VascuCel, which annualized this to $7,600,000. So it's doing better than we expected.

I think, competitively, we're finding it, it fits well inside of our sales bag, and our reps are paying attention to it. And I would also add that, in this, you know, unusual COVID period that we're having, you know, a lot of the CardioCel products are used on congenital heart defects. And those procedures, seem to be standing up pretty well. So I would say the early returns, early precincts reporting on tardia cell inside of LeMaitre are positive.

Speaker 4

Great. Thank you both for the color.

Speaker 5

Thank you, Susana.

Speaker 1

Thank you.

Speaker 0

So our next question comes from the line of Frank Tickenan with Lake Street Capital Markets. Your line is now open.

Speaker 6

Hey. Thanks, guys. I guess I have a couple questions here. So I wanted to first start a little bit more broadly speaking just based on the Levant business model. So the way I think about it is there's a diverse amount of products in a diverse amount of geographies.

So therefore, I would feel that it fares slightly above average to some of your peers, as you go through a time like this where it's choppy, where some geographies do better than others, some products do better than others. Obviously, there's varying degrees of severity within their respective procedures as well. So I was hoping you guys could give a summarized view of how you feel you're going to come out of this based on, what you've seen in the March compared to the April, based on what geographies you feel are gonna come back strongest and what products you feel are gonna come back strongly to, rebound coming out of this?

Speaker 2

Okay. So there's a lot in there. And I would say I'm going to keep trying to stay away from anything sort of forward leaning. I will say your initial, supposition about LeMaitre being, really well diversified by country and also by product line. I appreciate you doing the heavy lifting for me on this call, which is that's an important facet of the company is that we are really well diversified.

So you're going to see we know we're going to see different answers in different countries. And we'll probably be able to get some information early from certain countries that will lead us to do certain things in other countries. So we're excited about the diversification of the company. I think it's very clear from the press that Japan has been less impacted from all this. And that's a big piece of who we are.

I think we're about 4% our revenue is about 4% Japanese. We started in Australia in 2013. We've had great success there. So Australia, New Zealand, again, I'm going back to the press clippings here rather than what's happening inside Le Maitre. But it stands to reason those two countries are going to do really well.

And then some of the distribution markets like Taiwan and Korea, you can read people saying, hey, things are generally gonna be okay there. But in these other Western markets, you know, you're reading as well as I am, and we're all in sort of a who knows, let's see what happens mode.

Speaker 6

Got it. And then, in regards to gross margins, I know you I I appreciate that you've, withdrawn guidance, but I know the original thought was that was something that could potentially trough in the first half of this year and then start to rebound into the next half of this year. So I was hoping you could give some anecdotal comments on, different gross margin improvement initiatives and how they're, how it has been impacted by C-nineteen in regards to timeline?

Speaker 1

Well, can this is JJ. I can tell you sort of maybe the sequential story a little bit, and maybe that'll help you. Obviously, we're not giving guidance going forward, but maybe I can give a little color there also. So sequentially, we were up 1%. We do price increases typically at the beginning of the year, and so that helps us.

And to the extent that you have lower sales in geographies with comparatively lower margins like China, you're going to have a tailwind to your margin. So in China, sequentially, I think we were down $350,000 or something like that. But it helped the margin 05% or more. We had a really strong restore flow quarter in Q1, and so that conversely hurt the margin, comparatively lower margins there, but more RestoreFlow sales, maybe $1,000,000 or so more sequentially, think. Maybe that's a little bit high, but in that range.

And so mix is a big part of the story, and it goes to your first question of you know, what's going to change first and what's going to recover first. And that's really just tough to say. At a higher level maybe I would say, as volume goes down, you know, maybe you have sort of less variable or direct labor hours to amortize those fixed costs. So that's probably a little bit of a headwind, generically speaking, directionally. But again, that mixed piece is certainly a pretty important part of the story.

Speaker 6

Got it. All right. Thank you. That's all I had.

Speaker 0

Thank you. And our next question comes from the line of Mike Petusky with Barrington Research. Your line is now open.

Speaker 7

Thanks guys. Good evening. Could you give in terms of Q1 sort of you called out biologic patches, allografts and valvulotomes. Could you just say sort of the growth rates of those respectively?

Speaker 1

So, like, valvulotomes were 11%. And, what were you looking for? Patches. Bovine patches were about 3%. And what was the third one you wanted?

Allograft. Allograft's Allografts, about 55%.

Speaker 6

Up 55 A

Speaker 1

really nice answer in the allograft Q1.

Speaker 7

Excellent. All right, George, let me ask you this. New York, New Jersey, Massachusetts all heavily hit, I think, actually the top three states in terms of impact. Do you have any sense, just offhand, what percentage of your U. S.

Revenues come out of those three states?

Speaker 2

Boy, that's a great question. I don't have that with me right now.

Speaker 7

Okay. Alright. And then I guess Would

Speaker 2

be Sorry about that.

Speaker 1

Oh, no problem.

Speaker 7

So I guess then in terms of, the cost cuts, I may have missed this, but did you guys speak at all about r and d, anything you're doing differently there as you move forward?

Speaker 2

No. But if you're it to the cost cut, there's an angle on that question. In the quarter, oddly, R and D was 10% of revenue. So it's a high watermark for us. But maybe it's worth I know you didn't exactly ask this question, but maybe it's worth digging into that.

A lot of it is the MDR process over in Europe is extremely expensive. And the transferring of these factories that we've been doing for the last two years, which a lot of them, as we talked about, as Jim was asking at the beginning of the phone call, are sort of coming to a head right now. There's a lot of transference costs. And I would say that's sort of twothree of that 10% of those two buckets. So a lot of money in R and D, not so much at what you'd think of as classic medical device research and development R and D.

Speaker 7

Okay. Are you guys going to try to make as you move forward, though, you going to try to make any adjustments there? Or is it really just in the G and A and sales and marketing?

Speaker 2

And you mean adjustments downwards or more Yes, of guess investment

Speaker 0

in R and

Speaker 7

companies that I've listened to so far this quarter have talked about streamlining, maybe eliminating sort of lower potential projects, that sort of thing. Are you guys doing anything along those lines or no?

Speaker 2

Well, a couple of the projects fell out when we made acquisitions in the same segment. And so a couple XenoSure related products that we were going to do, like XenoSure two point o, we didn't need to do. But, no, not really. I mean, I will say the the the layoffs hit the r and d department like they hit all departments. And I think, I don't know, four of 12 engineers were let go.

So it's it's not like we have a lot of firepower in there. I do feel like we're in a whole different place in terms of we're circling the wagons. We're trying to figure out what this all means, and we're trying to rebuild a profitable entity in the wake of all this and see what happens then. And I think the R and D, the creativity of the R and D department probably goes down in the short run. But as a medical advice company, you've to have an R and D effort of some sort.

Speaker 7

Yes, absolutely. Yes, I guess also I wanted to ask on the dividend. I mean, is that sort of a sacred cow that you really don't want to look at at this point? Or is there room to sort of look at that as you move forward?

Speaker 2

I mean, I think you always have to be evaluating that. I would say it's an action that I hope you all look at and you go, Oh, well, listen to people's actions, not their words. And it's an action that says, Hey, we feel good about where the company is. We feel great about the cash position. And I'd even add to that, we feel great about having 41,000,000 worth of inventory, a lot of it which is finished goods, which will turn into cash quickly.

So when we first got into this a month ago, you know, we all experienced a different range of emotions around the COVID thing. There was, oh my god, someday. And then someday, it was like, oh, it's gonna be okay. And I think you start looking around going, what about the cash? And so we feel really good about the cash.

And I think that decision by the board was made only two days ago. So the board had all of these facts in front of them, and they still said, hey, let's let $1,900,000 of cash out the door in the form of a dividend.

Speaker 7

Okay. And then just, I guess, last question for me. I'm assuming that you guys are in touch with some of your key docs. I mean, and some of these states are making some movement towards opening up for, you know, elective surgeries and such. I mean, is there just anything that you can speak to in terms of of, you know, conversations you've had along those lines and and what you're hearing?

Thanks.

Speaker 5

Yeah. Mike, it's Dave. It's a good question. I do believe that, you know, I spoke with several docs a few weeks ago, and, what was apparent was that the COVID pandemic was hitting different parts of the country at different times. And so, again, this was a few weeks ago, but there were some cities in the Midwest which were still doing elective surgery, and then there were plenty of places like New York City or Boston where it wasn't taking place.

So it it's very regionalized and even, you know, down to specific cities, what's happening. You know? And we've already talked about the types of you know, some products continue to be used that are, you know, in more emergency situations like embolectomy catheters or CardioCel, even our allografts. Whereas other products, you know, the procedures may be getting deferred in regions where COVID is more prevalent, like, Trivex, for example. So, it's it's it's a sort of a patchwork all around the country and around the world, and that's what we're finding.

Speaker 7

Gotcha. You. All right. Thanks so much, guys. Really appreciate it.

Speaker 5

Thank you, Mike.

Speaker 0

Thank you. I'm not showing any further questions on the phone line. So ladies and gentlemen that concludes today's question and that concludes today's conference. I would now like to thank you for your participation. You may all disconnect and have a great day.