LeMaitre Vascular - Earnings Call - Q2 2021

Transcript

Speaker 0

Welcome to the LeMaitre Vascular q two twenty twenty one 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 mister JJ Palabrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Speaker 1

Thank you, operator. Good afternoon, and thank you for joining us on our Q2 twenty twenty one conference call. With me on today's call are our Chairman and CEO, George Lemaitre and our President, Dave Roberts. Before we begin, I'll read our safe harbor statement. Today, we will 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, anticipate, pursue, forecast and similar expressions. Our forward looking statements are based on our estimates and assumptions as of today, 07/29/2021, 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 ks and subsequent SEC filings, including the disclosures of 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 EBITDA and non GAAP outstanding debt. A reconciliation of GAAP to non GAAP measures is discussed in this call and 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

Speaker 2

to George Lemaitre. Thanks, JJ. On today's call, I'll cover three topics: number one, COVID's impact on our employees number two, record Q2 sales and finally, number three, rebuilding our sales force. First, I'd like to review COVID's impact on our team. Thirty eight employees have been infected since the pandemic began, with all now recovered.

Thanks to the availability of vaccines, our U. S. And U. K. Staff returned to the office on June 21, and our EU and Canadian staff did the same on July 26.

And we continue to observe health and safety measures in our facilities. We posted record sales of 40,700,000 in Q2, up 64% versus the COVID affected Q2 twenty twenty. Sales grew 83% in The Americas, 36% in EMEA, and 30% in APAC. By product, autograft sales were $6,700,000 in Q2, and there were several records, valvatomes, carotid shunts, carotid patches, and allografts. APAC benefited in Q2 from $250,000 of Japanese XenoSure sales.

And we expect to submit XenoSure trial results to the Chinese FDA by October. Chinese XenoSure approval is likely in 2023 or 2024. We ended Q2 with 88 sales reps. Despite 27 open requisitions, sales rep hiring has been slow. We intend to return to our pre COVID high watermark of 112 reps.

Meanwhile, we're expanding our warehouses in England, Italy and Japan in order to improve customer connections and speed up order fulfillment. By October, we'll be shipping from our warehouses to hospitals in eight of our nine largest markets. With that, I'll turn the call over to JJ.

Speaker 1

Thanks, George. Our Q2 twenty twenty one gross margin was 65.8%, a decrease of 2.7 over the prior year period. The decrease was driven by changes in product mix, manufacturing inefficiencies related to our twenty twenty personnel reductions and inventory write downs, largely from our Tribex product line. We are currently rehiring manufacturing personnel, which should bring manufacturing efficiencies in the coming quarters. Posted operating income of $11,100,000 in Q2 twenty twenty one, more than onethree of which was contributed by ArtoGraft.

Operating income was also up due to restrained headcount growth. We ended Q2 twenty twenty one with four seventeen full time employees, including 88 sales reps, compared to pre COVID 2019 levels of four fifty four and 112, respectively. In Q2 twenty twenty one, our operating margin was 27%. Cash flow is also improving. EBITDA of $13,300,000 was up 108% year over year.

We ended Q2 twenty twenty one with $23,000,000 of debt and $21,800,000 of cash and investments. Since the June 2020 ArtoGraft acquisition, we have paid down $42,000,000 of debt from internally generated cash. And last week, we retired the remaining $23,000,000 with proceeds from our recent $54,000,000 stock offering. We continue to maintain our $25,000,000 untapped revolving line of credit. Improved profitability and cash flow have increased our access to debt and equity capital markets.

Turning to guidance for the full year 2021,

Speaker 3

our sales guidance of $154,100,000

Speaker 1

to $158,100,000 represents an increase of 21% at the midpoint versus the full year 2020. And our operating income guidance of $37,700,000 to $40,400,000 represents an increase of 36%. Our full year 2021 EPS guidance of $1.3 to $1.4 per share represents an increase of 30% at the midpoint. With that, I'll turn it back over to the operator for Q and A.

Speaker 0

Thank you, presenters. We have our first question from Rick Wise. Your line is open.

Speaker 4

Good afternoon, everybody. Maybe we could dig into a couple of topics. I mean obviously it's great to see the strong quarterly finish. And you've given

Speaker 3

us

Speaker 4

very specific guidance ranges for the third and fourth quarter. Thank you. It makes it easier. Maybe just as coming out of the second quarter, you could help us think about trends and momentum. Obviously, it's not surprising to imagine that the third quarter would be slightly seasonally slower, but have trends basically continued?

Have you seen any impact of COVID? Just in general, what are you seeing big picture out there? And how do you feel like you're set up for the third quarter?

Speaker 2

Rick, this is George. Thanks for the great question. So I'm to limit my comments, if that's okay, to Q2. I really don't want to get into what's going on in Q3 already. But as a comment that gets truncated June 30, it was a really strong quarter.

And we could feel the customers taking the products away from us during the quarter. And we're not trying to take any great credit. I think they've been waiting, and a lot of these procedures got backlogged. And we felt that in Q2. The big guessing game, I think, around our company and medical device companies in general would be, as you look at Q3, how does that continue if it continues?

Or does it sort of play out in Europe a little bit more than it plays out in The US? Maybe it's exhausted in The US. Those are unanswered questions for us. But in Q2, we definitely felt it. And we'll take a cautious wait and see approach to Q3 and see what happens.

And then it's how much do people take vacations as well in Q3? Do people feel like, particularly the Europeans, hey, we're on a vacation after all of this time? Or do they say, no, I want to go back and do my procedures, and we'll push the vacations into some other time. I don't know the answers to those questions. But we did our best with our guidance to try to answer those questions inside of our guidance.

Speaker 4

Okay. Maybe this is more for JJ. George talked about The UK staffing and Canadian staff back at facilities. You're talking about hiring, if I understood you, the manufacturing folks. My sense is you think there could be manufacturing efficiencies.

Just how do we think about the potential positive impact of all that? Maybe lower costs from getting everybody back on-site, more manufacturing personnel doing something that helps. How do we think about margins, the impact on margins going forward?

Speaker 3

Yes. Thanks for the question. So maybe the first piece of it is in Q1 and Q2, Rick, you got some extra excess and obsolete inventory write downs from product lines that aren't doing well or that were sort of exiting or just sort of struggling a little bit. And I think those abate for the second half of the year. And so maybe there's a little help there moving forward.

Seasonally, Q3 is typically a little bit better for gross margins oddly as well. So maybe you get a little help there in Q3. And then in terms of the direct labor folks, we did lay off a bunch of folks for and during COVID along with the layoffs that we made. Those inefficiencies are coming through now. And I feel like as you get into Q4, you start to run away from those.

And we've been working to hire more direct labor folks over the last month and maybe you get a benefit from those sort of as you move forward. So it's a combination of all those things. And I think the other piece of it may be Rick is autograft has been doing really well. And autograft has a nice strong gross margin. And so to the extent that, we continue to see strong quarterly numbers from arter graft that will help the margin as well.

Speaker 4

Got you. And maybe just last for me. It's given the much strengthened balance sheet, the greater financial flexibility, your strong cash flow, it's always hard, I mean somebody has to ask it, I'll take the fall. Maybe Mr. Roberts could discuss the M and A pipeline and just, does this set the stage for even more activities?

Just any update, any color there, Dave.

Speaker 5

Yes. Hi, Rick. Thanks for the good question. Yes. I mean, obviously, we're very pleased with that equity offering.

It was nice to pay off the debt, save a little bit of interest, have a clean balance sheet optically for potential sellers, and just frankly to have more dry powder. In terms of the pipeline itself, I would say, you know, during COVID, it did restrict travel a little bit. A lot of the congresses had shut down. We're seeing them starting to open a little bit, and travel is picking up a little bit. So we are pursuing various targets.

I think maybe an object lesson from the ArteGraft acquisition a little over a year ago was for us to be considering larger targets. ArtoGraft is going very well, obviously, as you can tell. And also to borrow money, we've got a lot of EBITDA, we could leverage that. So we are looking at larger targets these days. I would say our focus hasn't really shifted.

We're still focused really on disposables and implantables used by vascular surgeons, maybe branching out a little bit into endovascular or cardiac surgery. But we like the niche markets, and we can look a little bit larger. So we just wanted to be prepared for that. And we'll see when a willing seller that meets all of the strategic criteria shows up, we will be ready for if and when that time comes.

Speaker 4

Thanks very much.

Speaker 0

We have our next question Line is open.

Speaker 6

Great. And thank you for taking the questions. Just on the second half outlook here, I understand not wanting to give too much color around phasing in 3Q and 4Q and some of the caution here. But I guess why would 4Q not be better than 2Q, given where we're at today?

Speaker 1

And

Speaker 2

you're talking about sales or are you talking about op income?

Speaker 6

Yes. Sales.

Speaker 2

Okay. Sorry. And you're looking at sequentially from q three to q four or from Yeah.

Speaker 6

Q q q two to q three q q '2. I can understand, like,

Speaker 3

q three, we're we're still in a little bit of a gray

Speaker 2

area. No

Speaker 6

one really no one no one really kinda people aren't sure what what people are doing this summer. But I think q four seems like it should be it should be a little bit stronger than what you what you have implied in your opinion or what you have put out there for your for your guidance.

Speaker 5

Matt, it's Dave. Good to hear your voice. Thanks for the question. I'll start it and then George or JJ may add in. But q two was a unique quarter for us, particularly in The United States.

What we saw, what we all felt here in The US was the COVID pandemic maybe lessening a little bit. We believe we did feel a backlog of cases come through, which is why we saw such widespread growth among our product lines, so many different products setting records that I think was unprecedented. But now with the Delta variant and we're hearing about elective surgeries at some hospitals in the Southeast shutting down, and it's just Q3. And then, of course, we know that COVID likes the cold weather. It's really it's you know, we have to be a little cautious as we think about how to sequence in Q3 and in Q4.

So that certainly was a consideration, but I'll open it up to either George or JJ if they want add.

Speaker 2

The quick FX So we're pretty European business, and we'll lose about $200,000 of sales going from Q3 to Q2. There's the CE marking thing, Matt. There's a little nuance here. So while we were thrilled and we wrote a press release on May 25 to get those five CE marks, we have continued to put the message out there that there's that two of the products that they approved, name and the more important one being XenoSure, they approved a device that we weren't making before the actual approval.

They approved a device that had four years and a slightly different IFU, etcetera, etcetera. Long story, but we had to start making the product all from new. And so we were selling, oddly and ironically, we were selling under derogation before May 25. And then as of May 25, you couldn't do that anymore in most markets. And so post May 25, for XenoSure, in Europe, you should expect struggle.

So maybe that links up a little bit. And then I would say we're trying to figure out my final point would be, so FX, the CE marks, not really in Q3 being a great thing, but coming back We should be fine in Q4 for all the CE issues. And so I'd say those are two big issues. And then, you know, we're a pretty European business.

And normally, again, we don't know what's going to happen, normally those folks take vacations in the summer, and we usually see a downdraft of, I don't know, something like three percent or 4% from Q2 to Q3. So our normal seasonality would have projected these numbers as well.

Speaker 3

Yeah, and I might add one more to this, which is you're trying to figure out the COVID pace of recovery in Europe in Q4. And, it's kind of probably not something you want to get out on a limb on. So maybe if we think there's going to be a bit of an opening there, more folks going into hospitals, getting treatments, but not a crazy opening like we feel like we felt in Q2 in The U. S. Maybe that's a more sort of prudent approach.

And at the end of the day, it's still a seven percent growth rate, and tough sort of comps, if you will, as we got away from COVID last year. So I still feel like it's a pretty nice number.

Speaker 0

Okay. Thank you for all the color on that.

Speaker 6

And then just one last question. Just the pace of hiring for the Salesforce to get back up to where you were before. Now how how long do you think that could that that that that could take you?

Speaker 2

Right. Matt, that's a great question. This is George again. Yeah, it's been a little bit frustrating. We've only picked up a net two sales reps in three months.

I think the pace will start accelerating. But the last time we spoke, I had 15 open requisitions, I believe, at the last call. And I have 27 sitting out there right now. I've gone a little bit wider geographically. While it's, I would say, it's twothree, or should be twothree an American issue because of this new autograft acquisition.

We've gotten a little bit more, okay, well, can fill in in Japan. We got that Japanese XenoSure approval and some stuff in Europe with the comeback of XenoSure in Q4 for XenoSure Europe. So I don't know when. It does feel like it'll start getting a little faster. In the meantime, also, sort of in terms of teeing up the hiring machine, we've got a net add of about two new regional sales managers, one in Europe and one in The US.

And I think, you know, that's on a number of, like, 15 or 16. So you got more hirers, and I think with 27 spots open, you'll see it pick up. But, you know, it's tough to guide when people will take jobs. And I'm sure on all the phone calls you've been on so far, I'm gonna guess folks are complaining a little bit about, hey. It's hard to hire people.

And I think we're running into that as well.

Speaker 7

Yep. Every single one.

Speaker 6

Alright. Thank you, guys.

Speaker 2

Thank you very much.

Speaker 0

We have our next question from Your line is open.

Speaker 8

Good evening, guys. A couple of questions. JJ, I'm assuming sort of a pro form a balance sheet is something I mean, is it essentially zero debt and $50,000,000 cash roughly? I mean is that basically the math?

Speaker 3

I think that's directional. Raise was 54.5% and then there's 6% or so for the banks. We keep the rest, take out 23% of debt and then you can take the rest of that and put it under the cash balance.

Speaker 8

Got it.

Speaker 6

All

Speaker 8

right. So Dave, I guess I wanted to in terms of just some of the targets you're looking at, I know some of these conversations go on for several quarters or multiple years or whatever, but when you look at sort of the whatever the number of targets are conversations that are going on. I mean, are there sort of autograph size deals that you're you know, you would say you were in meaningful conversations with at this point?

Speaker 5

Yeah. I mean, without get these discussions can turn on a dime. I would say I've got a handful of opportunities, the range up to 25,000,000 in revenue at the moment. ArtoGraft, you'll remember, its trade sales were 15,600,000.0 in the LTM period prior to the acquisition. Its hospital sales, Mike, were 18,600,000.0.

So, you know, so there are, you know, there are opportunities that are larger than autograft, and there are opportunities that are smaller at the moment.

Speaker 8

Sure. Okay. Alright. Great. And, George, in in term if this variant issue heats up, are there things that you you all learned just in terms of, you know, getting employees back to work and whatever social distancing, PPE, etcetera?

I mean, if this variant does sort of become a thing, are there things that you sort of learned in 2,020 that, you know, you think will make it easier to keep your folks healthier? I know I know nothing's foolproof, but I guess that's the question. Thanks.

Speaker 2

Sure. Okay. So the things that we learned. You know, I think there may also maybe more so than us. I think it might be the employees themselves, and I can't speak for all 400 of them.

But I think they've all come to terms with COVID in their own way, and they're watching us. We have all these distancing watches, and we check temperatures on the way in. We're all spread out in all our facilities. And I think they've learned, oh, there are no COVID spreads within LeMaitre Vascular's building. I think there was one documented spread.

And so I think maybe it's more what they've learned about what the risks they're willing to take on weekends at dinners and things like that. But we've called them back to work. We really didn't get much blowback on that. We were happily surprised. There's a couple of people that needed some variances from what we were selling to everyone.

But it's been nice. We haven't heard anything about it. So I think for now, we're good to go, and I think people are learning how to handle this thing better. But I think it's more about the employees and their approach to us rather than what we're learning. We're now still doing the same thing we've been doing for twelve or fourteen months with all these distancing watches and six feet and everything like that.

Speaker 6

Okay. Great.

Speaker 8

I'm curious, has ArteGraft now passed Valvius Homes as a product category, just in terms of top line revenue?

Speaker 2

You know, 6.7 is that. I would say that the whole category of valvulotomes, no, it hasn't passed that, but it's gotten past some of the brands, some of the individual brands. So we have two or three brands inside of there. But the whole category, no, the Valvatome is still the largest category of the company.

Speaker 8

Okay. And is that is that north of 30,000,000? I I don't suspect it's north of 40,000,000.

Speaker 2

Hang on a second. I I'm happy to tell you what the Q one numb the Q two number was. So let me just get it. JJ or Dave, do have that handy? I have the organic number here.

Q2Valvulotome7.7.

Speaker 3

Gotcha.

Speaker 2

And the autograph, just for everyone following along, is 6.7 in the quarter. That includes allocated shipping for both product lines.

Speaker 8

All right. Very good. Thanks. Congratulations on the continued I can't believe if you had told me we'd be here a year ago, I wouldn't have believed it. Congratulations.

Thanks.

Speaker 2

Thanks, Mike.

Speaker 0

There are no more questions at this time, presenters.

Speaker 2

Okay. Thank you. Thank you very much, operator. I guess it's time to hang up.

Speaker 0

Okay. 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.