LeMaitre Vascular Inc (LMAT) 2021 Q4 法說會逐字稿

Welcome to the LeMaitre Vascular Q4 2021 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.

Thank you, Vanessa. Good afternoon, and thank you for joining us on our Q4 2021 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, February 24, 2022, 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 EBITDA and organic sales growth. 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 George LeMaitre.

Thanks, JJ. On today's call, I'll cover 3 topics: Q4 sales; the impact of Omicron; and finally, our continued head count growth, including sales reps and production personnel.

Sales were up 5% to $39.5 million in Q4. Sales grew 8% in the Americas and 1% in Europe, while APAC was down 3%. Artegraft and XenoSure led Q4 sales growth. Artegraft sales were up 16% year-over-year to $6.4 million, and we posted record XenoSure sales.

We believe Omicron and associated staffing shortages decreased sales in Q4 as hospitals deferred elective surgeries. At LeMaitre, about 10% of our 450 employees contracted the virus in the last 3 months. And as a result, we implemented additional safety measures including work from home, free rapid tests, free N95 masks and $100 booster bonuses. Also, for a second straight year, our January sales kickoff meetings were virtual. About 95% of our employees are fully vaccinated and will soon offer on-campus booster clinics.

We're currently at a high watermark of 498 employees with most of the increases coming in sales and production. We have 107 reps on payroll today and will likely be adding another 10 in H1. In manufacturing, we continue to hire as we recommit to no back orders and combat any potential supply chain issues. Today's the 177 direct labor employees is also a high watermark.

Internationally, we continue to grow our sales footprint and our facilities. With the recent hiring of a Korean country manager, we expect to open a Seoul office in Q2. This will enable us to sell XenoSure in Korea in 2022 and most other products to follow in 2023. Korea will join Japan, China, Australia, New Zealand, Singapore and Malaysia as our seventh direct market in APAC. Korea was our second-largest distribution market in 2021.

In 2021, we also expanded our warehouse and office facilities in Japan, Italy and England to ensure adequate product supply and timely delivery. Notably, we installed a cryo freezer in our Hereford, England facility and in Q1 received U.K. tissue bank approval for our allografts. The U.K. will be our third country with an allograft approval, joining the U.S. and Canada. Deliveries to U.K. hospitals should begin soon.

Despite increased head count and Omicron challenges, we posted a 21% Q4 op margin and ended the year with $70 million of cash. We also increased our dividend for the 11th straight year, underscoring LeMaitre's focus on profitability and cash generation. As you've seen, we like to use this cash for acquisitions, dividends and distributor buyouts.

I'll now turn the call over to JJ.

Thanks, George.

Before I discuss the quarter, I'll say a few words about last year. Sales in 2021 were $154.4 million, up 19% versus 2020. The Americas grew 26%; Europe, 8%; and APAC, 15%. Increases were driven by a full year of Artegraft revenues as well as increased valvulotome and XenoSure sales. On the bottom line, operating income and net income both grew by 27% in 2021 as sales growth outpaced operating expense growth. We also completed a number of important initiatives in 2021, including restoration of our CE marks, progress on our various production transfers, hiring 23 sales reps, product offering simplifications, increasing the size of our manufacturing team and the completion of a secondary stock offering.

With regard to our Q4 2021 results. Our gross margin in the period was 65.7%, a 70 basis point increase over Q4 2020. The increase was driven by average selling price increases and favorable sales mix as well as Artegraft purchase accounting charges in Q4 2020. Q4 operating income was $8.3 million, a decrease of 13% versus Q4 2020. The decrease was driven by increased operating expenses as we continue to reinvest in sales reps and increase our regulatory spend particularly as Europe transitions to the new MDR CE mark.

In order to reduce our manufacturing, labor and overhead rates and therefore improve gross margin, we have recently hired about 45 direct labor employees. As we evaluate our gross margin on an annual basis, it is important to note that in 2021, we incurred significant costs, rationalizing our product portfolio. In fact, we reduced our SKUs by 18% in the year and began shutting down 4 small and underperforming product lines. These product line terminations contributed to the outsized inventory write-offs of $3.8 million in 2021. Additionally, manufacturing, over time and increased XenoSure freight costs reduced the gross margin in 2021. And these 2 issues should abate in the coming quarters.

We ended Q4 2021 with no debt and $70 million of cash and investments. The $2.9 million cash increase versus Q3 2021 was driven by $10.6 million in Q4 EBITDA and $1.7 million from stock option exercises. After completing the payoff of both our term loan and revolver last summer, in November -- on November 30, we canceled our lending agreements. This eliminated annual charges of approximately $215,000, but it resulted in a onetime below-the-line noncash charge of $495,000 in Q4 2021. We'd like to thank our partners at KeyBanc, whose $65 million loan to us during the initial COVID crisis facilitated the Artegraft acquisition.

Turning to guidance. We expect Q1 2022 sales of $37.7 million to $39.7 million, which represents an increase of 8% at the midpoint versus Q1 2021 and 10% organically. We also expect operating income of $7.1 million to $8.4 million, which represents a decrease of 3% at the midpoint. Our Q1 2022 EPS guidance of $0.26 a share to $0.30 per share implies a midpoint of $0.28 per share. EPS in the year earlier quarter was also $0.28 per share.

For the full year 2022, we expect sales of $162 million to $166 million, which represents an increase of 6% at the midpoint versus 2021 and 8% organically. We also expect operating income of $38.5 million to $41.1 million, which represents an increase of 9% at the midpoint. Our 2022 EPS guidance of $1.35 to $1.45 per share represents an increase of 12% at the midpoint.

With that, I'll turn it back over to Vanessa for questions.

(Operator Instructions)

Vanessa, it's George. Do you think we should let someone ask a question out there? It seems like there's a queue. And is it time for a question? Is that what we're trying to do here?

It looks like we have our first question from Brooks O'Neil with Lake Street.

I have a couple of questions, and I appreciate the opportunity to ask. So first, you probably read in some of my notes that I referred to something I call the LeMaitre playbook. Given all of the uncertainties and challenges in the world, would you anticipate any fundamental changes to your execution against the LeMaitre playbook going forward?

Brooks, it's George. Short answer to your question, no, I don't think we're going to change our playbook.

Great. Secondly, I'm curious, I think David told me that you guys took another price increase on Artegraft earlier or either late in 2021 or earlier this year. Could you comment on the reaction in the marketplace to that price increase?

Sure. It was an 11% price increase in January, and the reaction seems to have been just fine. It was a smaller increase than the year before, Brooks, when it was 25%.

Yes. Okay. And then one last question, and I appreciate the opportunity again. I noticed I think you guys announced a $20 million share repurchase program after the close. And I'm curious, as you and David and the Board look out at the acquisition environment versus the opportunity by your stock, would you say you have a particular preference for one or the other? Or will you just continue to be fairly opportunistic to try to drive the highest ROIC you can generate?

Brooks, it's Dave. Good question. We're always looking to drive ROIC. I would say -- I mean, as you know, I spearhead acquisitions. So we're always on the hunt looking for good acquisitions. And when we find them at the right price, we will execute. But in the meantime, it's basically good housekeeping, good governance to have a share repurchase program authorized. And as the company gets bigger, we found it appropriate to slightly increase the size of the authorization.

We have our next question from Scott Henry with ROTH Capital.

Just a couple of questions. First, could you break out biologics versus non-biologics in the quarter?

Sure. Biologics -- Scott, it's Dave here. We're 48% of sales, and they were up 10%.

Great. And then could you comment on valvulotomes, how they were in the quarter?

Sure, Scott. This is George. Valvulotomes had a good quarter. We had 3 big growers in the quarter: Artegraft, valvulotomes and Xeno. I'm scratching for what the percentage growth was, but I know it was 1 of the top 3 growers. We'll get back to you during the call if we find that, okay?

Okay. I appreciate that. Final question, spending levels were a little higher in the quarter, I think, than trend. Would you -- should we think about that as a continuing-ish trend line? Or do you think spending might kind of pull off a little bit?

Thanks, Scott. Yes, this is JJ. It's a good question. Yes, a little higher than trend. You know we're hiring sales reps, and we're hiring folks in other areas of the business as well, sort of that bounce back and rebuild from the COVID topics over the last 1.5 years or so. And we'll continue to do that. But there's a seasonal piece of sort of Q4 and Q1 as well, so you might expect to see sort of higher levels around Q4 and Q1, and then sort of it tapers off as the quarters move on. So I would say, yes, that's the trend that we've sort of outlined for you guys, but cost containment has been a hallmark of the company over time, and we'll keep a close eye on op expenses as we move throughout the year.

Okay. And maybe if I could just follow up specifically on the R&D side, which seemed to be a little more of an outlier in Q4. Is that just some kind of noise, like as you mentioned, seasonally, we're going to see higher and lower quarters? Or is there anything going on focused on R&D or a specific trial that I should be thinking about?

Right, Scott, I think what you're seeing inside that number is the continued exceptional expenses around our CE marks, so the MDD CE marks that we were trying to get all of 2021 and we succeeded. And now kicking in as the MDR CE marks, which I would call sort of the varsity-level CE marks that you need to get by 2024, and the spending has begun there. It was a particularly expensive quarter on that stuff. Not necessarily repeated every single quarter going forward, but a lot of the R&D money these days going towards European regulatory.

(Operator Instructions) We have our next question from Zachary Weiner with Jefferies.

A couple from me. First, on reps, can you give some color on expected product sales per rep and how long it will take the new reps -- and I think you mentioned 10 coming in, in the first half. How long will it take them to get up to speed? Are they seasoned reps or they're relatively new? And then I have a couple of follow-ups as well.

Okay. So lots of questions in there. I would say we always get asked that question. We always give an unsatisfactory answer, Zach. And maybe -- and this is George, Zach, sorry. Maybe it feels like we'd got great reps. They're up and running in 3 months. And if some reps never really get going, and so maybe if I could call it a number like 6 to 9 months, that feels okay to me. They don't last forever. The turnover rate is something like 16%, and that would indicate they're sort of 3- or 5-year folks. So you got to get them up and running pretty quickly to make it work for the company.

And then the model that you're talking about, when we're looking to put quotas on each of these reps, I'll give you the U.S. model, I think we're asking for roughly -- and it changes every year, but we're asking for something like $90,000 to $120,000 in GP addition in the year following -- in everyone's plan every single year. So something like that would be the model. You're trying to get them to grow business by that much GP every year.

And then any color on getting back to that high watermark in terms of reps within the company? I think the number in the high watermark pre-COVID was, I think, 130, maybe 140. So any color there?

Okay. So Zach, apologies for correcting you, but it's actually 112 or 114 is our high watermark. So we're right there. And I hope at least 2 times from now when we talk to you, we'll be past the high watermark. But if not, the next time we'll talk to you we'll be at the high watermark.

Understood. No, I appreciate the correction. Shifting gears here just to M&A, and I know someone has asked them on one of the previous questions. But is there any area of the business that you look to bolster more with M&A with Artegraft and (inaudible) is the biologics space still a focus of the company?

Yes, Zach, this is Dave. It's a good question. I mean, obviously, the biologics portfolio that we have acquired has done quite well for us, so we certainly continue to look there. I would say at a higher level, we're hunting in the open vascular surgery and dialysis access space. That's sort of the main hunting ground for us. But we've started to expand a little bit, looking at some adjacent markets, for example, cardiac surgery. And we've looked at some biologic products there also. So I think the theme is open surgery used in hospitals and preferably niche, low-rivaling markets. With revenue, targets need to have, I would say, $10 million of revenue or so or more would be ideal.

Yes, that's helpful. And then if I could just sneak one last one in here. Through COVID, the rep access has been a point of contention through the height of COVID. And then at COVID, you've gotten more access. I guess, can you just give a little insight on rep access to that portion of 4Q and then how things are going through the first couple of weeks here in the first quarter of 2022?

Okay. Zach, that's a great question. I'm sure it's something that's on a lot of people's minds. Maybe I answer it in a slightly different manner. Rather than using word rep access, maybe it's just procedure volumes and feelings in hospitals. And I think what we get, what Dave and JJ and I get from our sales reps at our Friday sales calls is that the last week of December and then the full month of January was the tough sledding spot. And it was driven, of course, by Omicron, but it was even more driven by staffing shortages in hospitals. Those 2 things conspired elective surgeries to go down for roughly that 5-week period.

And then I'm sure you're hearing this from the other companies as well, but I'm happy to report that it seems very much so, and we're 70 -- we're 60% U.S.A., our revenues. And it seems very much like, at least in the U.S., things are very much opening up again. In terms of February, the full month of February, kind of feels like a normal month. And I don't know how -- I don't know where Omicron goes or I don't know where the rest of the crisis goes, but it feels very open right now.

And we have our next question from Javier Fonseca with Spartan Capital.

I had a quick question on -- to just get more color as far as the sales force, so as previously mentioned on this call and in the previous earnings call of the high watermark of 112 reps, my question is, for the end of the year 2022, what is management's expectation for the number of sales reps? Or can you provide any more clarity as far as how much you want -- how many more people you want to add to your sales force by the end of that year -- of this year?

Sure. Javier, it's George. It feels like if we're at 107 right this moment, it feels like the company is trying to land between something like 115 and 120 or something like that. It is hard, though. Again, there's turnover in these sales forces, so it's not always something that's at my desk to decide. A lot of people just decide to leave at certain times. So I would say, short answer to your question, 115, 120, something like that.

Okay. And do you have any specific, how do you say, like drivers or plans to get to that number?

Very much so, yes. I mean we mentioned on the call today that we think another 10 will get hired in H1, so you could add 107 plus 10 and get to 117. Also sort of breaking that down, we have 4 reps that are signed right now that don't work here yet. So that's 111. And then we have 10 more requisitions out there where the rep hasn't signed and they're coming on. So it's happening, and we're very -- particularly in the U.S., I'd say we've been very aggressive about we built out to 62 territories this year in our U.S.A. plan. And we're chasing that, and we're trying to make that happen. We have to watch our nickels and dimes here as well. We try to have a profit around here, but that's been one of the focus areas of the company is to build back the sales force.

I'm standing by for further questions. And that concludes our question-and-answer session. And thank you, 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.