LeMaitre Vascular Inc (LMAT) 2022 Q1 法說會逐字稿

Welcome to the LeMaitre Vascular Q1 2022 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.

Good afternoon, and thank you for joining us on our Q1 2022 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, April 28, 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 organic sales growth as well as operating income and EPS, excluding special charges. 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 4 topics: Q1 organic sales growth of 13%; continued sales force growth to 112 reps; going direct in Korea and the stronger U.S. dollar. Sales were $39.6 million in Q1, a 13% organic increase versus the year ago quarter.

All 3 regions posted double-digit organic growth, the Americas, 12%; EMEA, 13%; and APAC, 15%. Due to Omicron's February improvement, the Q1 sales ramp was steep. $10.7 million in January, $13 million in February and a record $15.9 million in March. Artegraft and XenoSure once again led growth and both posted record quarters. Artegraft was up 18% to $6.9 million in Q1 as that acquisition continues to outperform expectations. XenoSure balanced in Europe and Japanese sales growth continued. Carotid shunts, allografts and valvulotomes also contributed to Q1 growth.

Notably, we sold our first allograft in Europe as that product received U.K. approval in March. We've also begun the application process for German allografts approval. We've built our sales force back to match our pre-COVID high watermark of 112 reps. This 30% year-over-year rep increase may have helped Q1, but will certainly be a tailwind going forward, and we're hiring reps in 14 more cities, mostly in the U.S. and Europe. We should have approximately 120 reps by December. We're also growing our presence in Asia. In April, we agreed to buy out our Korean distributor for $540,000 and we signed a 5-year office warehouse lease in Seoul.

Last year, JiSang bought $800,000 worth of devices from LeMaitre and sold them to Korean hospitals for approximately $1.6 million. We should be selling directly to Korean hospitals by January of next year. In the last 3 quarters of 2022, sales to the Korean distributor should be slow and we anticipate approximately $300,000 of operating expenses associated with our Seoul office. The new Seoul location is LeMaitre's 12th worldwide sales office and Korea will become LeMaitre's 25th direct-to-hospital country.

On a different note, recent foreign exchange movements are causing a markdown in our sales and op income estimates for full year 2022. The strengthening of the U.S. dollar since our February 24 earnings call is expected to reduce full year sales by $3 million. The same issue impacts the bottom line, reducing operating income by $1.6 million. Despite these currency swings, the fundamentals of LeMaitre's business remained unchanged from 2 months ago.

Indeed, full year 2022 organic sales growth is increasing slightly in today's guidance to 8.2% from 7.5% i the February 24 guidance. Before turning the call over to JJ, I'd also like to mention that in March, LeMaitre joined the NASDAQ U.S. Broad Dividend Achievers Index. This index is comprised of 373 public U.S. companies, which have increased their dividends for at least 10 straight years.

Our inclusion in the index underscores our long-standing focus on profitability and returning shareholder capital. I'll now turn the call over to JJ.

In Q1 2022, we posted a gross margin of 65.6%, a decrease of 70 basis points versus the prior year quarter. The strong U.S. dollar alone reduced the gross margin by 70 basis points in the quarter, while favorable product mix offset manufacturing inefficiencies. As we look to improve our gross margin, we continue to hire additional Burlington production staff, and we're now at a record 194 direct labor employees. This 49% year-over-year increase is intended to reduce our hourly labor rate.

The hiring surge and inventory build should also guard against these 3 issues, which caused back orders, CE marks MDR transition, the great resignation and supply chain disruptions. In another effort to improve our gross margin, in June, we will close our factory in St. Etienne, France. This 17-employee factory was acquired in 2018 and produced Wovex and Dialine polyester grafts, Chevalier valvulotomes and biologic glue.

Going forward, the manufacturer of Chevalier valvulotomes will transition to our Burlington facility, while production of other product lines will cease. We plan to sell out our current stock of Wovex and Dialine, after which we intend to transition these customers to our Burlington produced AlboGraft polyester grafts. We estimate that the closure will result in $3.1 million of special charges in 2022, $400,000 of which are noncash charges. Of the $3.1 million, $2.6 million will be charged in Q2 2022. The closure should produce savings of approximately $1 million per year beginning in 2023. Q1 2022 operating income was $7.9 million, flat versus the prior year period as 14% operating expense growth offset sales increases. Operating expense growth was driven by a 30% increase in sales reps to 112 at March 31, 2022. Our Q1 operating margin was 20%.

Going forward, we expect operating margins, excluding special charges, of 22% in Q2 and 22% for the full year 2022. We ended Q1 2022 with $70.1 million ((sic)) [$70.9 million] in cash, an increase of $900,000 versus Q4 2021. The increase was largely driven by cash from operations of $4.7 million, which was partially offset by dividends of $2.7 million. Turning to guidance. We expect Q2 2022 sales of $40.1 million to $42.1 million, which represents a reported increase of 1% at the midpoint versus Q2 2021 and 5% organically.

We also expect operating income of $5.7 million to $7 million, which represents a decrease of 43% at the midpoint and 19% excluding special charges. Our Q2 2022 EPS guidance of $0.20 to $0.25 per share implies a midpoint of $0.23 per share or $0.32 per share, excluding special charges. For the full year 2022, we expect sales of $160 million to $164 million, which represents an increase of 5% at the midpoint versus 2021 and 8% organically. We also expect operating income of $31.4 million to $34 million, which represents a decrease of 10% at the midpoint and 2% excluding special charges. Our 2022 EPS guidance of $1.10 to $1.20 per share represents a decrease of 8% at the midpoint and up 1%, excluding special charges. With that, I'll turn it back over to the operator for questions.

(Operator Instructions)

And our first question comes from the line of Zach Weiner of Jefferies.

Congrats on a good quarter. Just first, on the headcount expansion and how that puts through the OpEx. Can you just give some color there and how we should expect that? Is it all sitting in sales and marketing? Or is it a spread, I guess, between sales and marketing and general and admin?

Right and this is George, Zach. Thanks for the great question. So a lot of this is actually sitting in cost-to-goods sold. You noticed that we're talking about a 49% increase in the direct labor head count year-over-year. So a lot of it is going to be about producing goods and putting up on the balance sheet. So a lot of that is segregated away from the op expense report. But of course, we discussed we have at a high watermark here again for sales reps, and we're up 30% so we think that is indeed impacting the op expense statement as the year goes through. And of course, we plan to hire more of them. Counteracting that on the op expense line throughout the year is the FX effect that keeps on making that seem a little bit smaller, even though, of course, we all know we're hiring reps.

Got it. That's helpful. And then one just on procedure backlog. I know we've talked about it in the past, but just are you guys seeing anything? I know COVID has been I guess, less impactful through the tail end of the first quarter and even less in the second quarter. So far, it was in the U.S. Any comments on procedure backlog or backlog capture, I guess, now that COVID is -- at least for a majority of the revenue in the tail or in the rearview?

Right. So I'm going to limit my comments just inside of the first quarter and not talk about Q2, which I try to do. And I would say, I mentioned the sales numbers for January, February and March, we saw a real rush of procedure unloading in Q3 -- excuse me, in March, the third month of the quarter, and things were really slow in the last week of December of 2021 as well as the full month of January. So it was very different. They were being pent up in January, and we saw them get -- a bunch of them get released.

I said this in Q2 of 2021 on the call, and I'll say this now, in March, it felt really like the customers at our throat pulling devices out of our company, just like they were in Q2 of 2021, when we all thought the vaccines were going to solve everything, and it was a very strong Q2 of 2021. That's what March felt like.

No, that's helpful. If I could sneak more in on the 4Q call, you mentioned that there was going to be an 11% price increase on Artegraft in January. January feels like a long time ago now, with all the inflationary pricing that we're seeing in the broader environment, is there any risk or expectation to increase price mid-year. I know the LeMaitre playbook is to kind of do it at the beginning of the year and let it play out. But any expectation on another price increase?

Zach, it's Dave Roberts. At the moment, no, we did put that 11% price increase through on January 1, and it all seems to be sticking. So at the moment, no. But obviously, if circumstances changed a lot, we could reconsider.

(Operator Instructions)

And our next question comes from the line of Brooks O'Neil from Lake Street Capital.

I guess I am just a little confused, maybe I'm slow because I've been grinding through a bunch of models and earnings reports. But we're -- we've hired 30 reps. We're back or we started pre-pandemic. I think I heard you say the demand environment is really good, and we're thinking basically flat Q2 revenue. So -- just help me to be absolutely sure I understand what's going on out there in the world.

Brooks, it's George again. I'll start and if someone else wants to jump in, they can. Please keep in mind this FX thing, we tried to focus on is one of my key 4 talking points here. Every month, you get deeper in here, you're going to be working with a euro that's 105. That's what we've keyed into all of our models. And it was, I think, 112 in the Q1, and then it was something like 120 a year ago. Same thing now is also happening to Japanese yen. So 2 places where we're having a lot of success. Europe and Japan, we're getting killed by the FX. So I would say there's that.

You may also be responding and maybe you didn't ask this question, but I'll go ahead and answer it, "Hey, why is there only 5% organic growth between Q2 of last year, Q2 2021 and Q2 of this year?" And it's because last year was this incredible full quarter of, " Oh my gosh, I'll have vaccines. We're going to be fine." And everyone then went out to the hospital and got all those procedures. So Q2 of last year stands at just as crazy good quarter. And we're keying in that we're going to be 5% above that organically.

We feel comfortable with that. I think that's a local address of the Q2 question. As for the year, again, as you get deeper into the year, you're going to have 3 months of each quarter that's at this bad exchange rate. So that's hampering us a bit. And you also see this the Korean thing a little bit. You're losing revenue in Korea, but that's a very small piece of the puzzle.

And Brooks, I'll give you -- this is JJ. I'll just give you a couple of dollar numbers because they're pretty impressive. Year-over-year, FX is hurting in the quarter, $1.7 million, we think. And then sequentially, Q1 to Q2, it's almost a $700,000 hit to our top line. So these are not small numbers. And so the organic number still is nice enough, as George said, but on a reported basis, you're getting whacked with that FX pretty substantially.

To bring this point home -- sorry to hammer this too much, Brooks, but at the last call, the organic growth that we gave you all for the entire year was 7.5%, and at this call, it's 8.2%. So amazingly, even though it doesn't feel like it to you out there on the call, this is a bump in guidance, believe it or not, sales guidance.

You mean you're telling me that units or some measure like that is growing fast and getting better, but the FX thing is masking that?

Yes. In a short answer, yes. Sales -- if the FX rate hadn't changed since February 24 to April 28, sales guidance at this company would be up by a small amount, but it would still be up. So we would have bumped guidance up to account for the beat that we did in Q1 and then also some additional optimism about the last 3 quarters of the year. So this, believe it or not, it doesn't feel like it we're increasing guidance on the sales number if not for the FX problem.

Yes. No, that's really helpful because, obviously, it's not clear to me. I'm guessing there's at least 1 investor out there that's going to feel the same way and all the color you just gave, I think will, hopefully, will help me in probably other people as well, which is great. I guess I'll ask 1 more.

Curious, the acquisition environment, obviously, you've got a nice war chest on the balance sheet. You've done a beautiful job of integrating Artegraft. We know the playbook, maybe David can just give us a quick overview of what are you seeing out there in the world in terms of acquisition possibilities?

Yes. Thanks, Brooks. The short answer is definitely have a few targets in the pipeline. They tend to be revenue of $10 million or higher, definitely looking a little bit larger these days. I mean the core is disposables and implantables used by vascular surgeons. But we're also looking closely at adjacent markets, for example, peripheral endovascular, even cardiac surgery, where we get about 10% or 12% of our revenue. We'd like to stay in the niche market.

So we've got a few 2 or 3 targets that we're looking at. I think valuations, it feels like valuations sort of peaked I don't know about 6 or 8 months ago, they're declining, but sometimes it takes a little while for these sellers to get the e-mail on that. So I do have 1 seller that's sort of hung up on price. But otherwise, I feel like at least from a valuation standpoint, it's coming back down to earth a little bit.

Great. Perfect. I'm looking forward to the year even though the FX is moving around all over the place.

Thanks, Brooks.

And our next question comes from the line of Mike Petusky from Barrington Research.

A few questions. I guess, first, is there any way, JJ, you can provide the data that we got from Artegraft, like percentage increase in revenue on XenoSure and valvulotome. Is that handy by any chance?

Yes. So yes, Artegraft was up 16%, I think, in the quarter. That's sort of 11% price, I think George mentioned that earlier.

Was it 16% or 18%. I thought I heard 18%?

It was 18%, except the whole category, which includes another bovine graft was up 16%. So truly Artegraft, 18%.

Got you. And XenoSure and valvulotome?

Sure. I can give those to you. Valvulotome's up 10.4% organically for the quarter. And XenoSure, up 15.6% organically in the quarter.

Great. In terms of the sales rep figure, I can't remember where I may have heard this on a conference call, maybe on an MDR. I think at one point, you guys may have been talking that, that number could go north of 120. Is that still the plan? Or is that possibly pushed out until you guys work through some of those FX stuff. Just any commentary there?

Sure. I think we reread the transcript from the last earnings call today before we got on. I think at that call, we were talking 115 to 120. And I think we're pushing more up towards 120 in this phone call. What you're, maybe, talking about is, I think, in theory, we always sort of talk about, yes, maybe $1 million of sales deserves 1 sales rep as a real high-level talking point, but I don't think you've ever heard us come on this call in, say, 130 or 140. I think that's not what we've ever said. I think we've always been bounded by about 120. I don't remember talking over 120.

No, I don't think so. And Mike, also, I think to your earlier part of that question, there is definitely a balance going on between sales rep increase in head count and the bottom line, and we're certainly watching that. And it's a tough comp year, right? Last year was the year when COVID sales recovered, but expenses were still low. The bottom line was strong, and we're comping against that now. And you can see that in our numbers. But I think sequentially, we, sort of, we like the answers we're getting, and we certainly want to balance that growth of the bottom line with the growth of the sales reps.

So it's a little bit of a dance. You've seen us do it before. It's sort of been in our playbook for a long time. Last year was a little odd in a good way on the bottom line because of COVID, but we're back at that.

Okay. Great. And then sort of piggybacking on part of Brooks' question, just a bigger picture question in terms of capital allocation. Obviously, M&A is a possibility. You guys are making internal investment in some hiring and production. You have a share repurchase that I believe is still alive and not active, but authorized and you have obviously, the dividend and you've rated many years in a row. Can you -- George, can you just talk about where you -- how you would sort of stack rank those different capital allocation opportunities? And any color on that would be great.

Sure. And I might add one, too, but you got it basically. And I think if I was sitting with my checkbook, the big cheques I want to write are towards Dave's acquisitions, that's the #1 cheque I want to write. I want to write a cheque to the shareholders to let them know we make cash here, and we give it back to them. And then third, you're seeing this in this report and we do like to buy out our distributors when they get big enough and it's worthwhile on a project and you're seeing that in Korea. We like to buy out the distributors. So I'd say on a strictly cash allocation, I would say, that's where I'd go with my cash.

Are there other near-term opportunities on the distributor side?

There's always -- and short answer is yes. And Korea was 1 of 3 countries, so including -- of course, I don't think anyone would be excited if we said we're going direct in Russia. With the 3 big opportunities were Korea, Thailand and Russia, and we're in very early stages in Thailand, but we'll see where that goes. South Africa as well.

And Mike, it's Dave. Just to contextualize that. Korea was, I think, the second biggest distributor for us. So LeMaitre -- 95% of our revenue is direct-to-hospital. So distributors only account for 5% of the revenue. And so yes, we're -- we've gone direct in many countries over the years. I expect we'll continue to, as George has described. But in terms of like how much capital is directed, normally, we're paying, maybe, 1x the distributors selling margin, or selling profit. So it's not an enormous amount of capital compared, for example, to acquisitions.

Can I sneak one last one in? On, obviously, knocking out of the park with Artegraft and Xeno and valvulotome this quarter and FX, a huge drag. Is there anything that you guys can do? And I know you're always sort of looking at it and doing it from time to time and you sort of alluded to, with the closing of the facility, possibly doing some more of this. But -- are there opportunities on sort of the lower-margin products to rationalize them, possibly sell certain products or businesses? I mean -- or are you guys sort of running the way you want to run at this point?

Sure. Mike, that's a great question. I think we touched on this at the last call, but I'll expand on it even more. I think you'd be happy to know that we consider these things a little too small to spend your guys' time on. But we -- in the last about 18 months, we've thrown about 6 devices, not in the trash can, but we've written them off. You're feeling that in the P&L, even though we're not spending our time talking about it. We've written 6 small ones off. They are low-growth products -- sorry, negative growth products with bad gross margins. So we're excited that those are going away.

The bag is simplifying and then it allows us to point our 112 reps at sort of 9 better devices rather than 9 good devices and 6 bad devices. So yes, at a product line level and then furthermore, at an SKU level, last year, we got rid of 60 SKUs or stock keeping units, catalog numbers, if you will. And that was on a base of about 360.

So we fully got rid of 1/6 of our SKUs that does include those other product lines divestments, if you will. We're not selling them. We're just getting rid of them. Once in a while, we're thinking about selling them, but their product lines are small enough, that no one wants to add them.

And Mike, the good news is that they were only sort of 1% of sales or so. They're not a big answer on the sales line, maybe less of an answer on the GP line as a percentage of GP. So these aren't things that you would -- we'd do it, and then you'd go, "Oh, no, here goes 6% of sales." It's not that. It's more about operational sort of efficiency, streamlining, sales rep efficiency and focus and all that kind of good stuff.

And next question comes from the line of Jim Sidoti from Sidoti.

JJ, can you break out that $2.6 million charge, where that will be on the income statement?

Yes. That is mostly severance charges, Jim. There's a component that's sort of fixed is a component you negotiate, then there's some fringe on top of that. And on the P&L, it's going to be its own separate line above op income.

Okay. And then I assume there's going to be some cost to start up the facility to build the valvulotomes in Burlington, when will you start to incur those costs?

Jim, this is George. I'll be happy to know it's already done. We've been doing it for the last 18 months.

Okay. And then when we think about 2023, will any of these charges spill over? Or should we consider when we start our model for 2020 that we should start at that 121 to 131 number?

Yes. There's going to be a small carryover probably $100,000, $150,000, maybe $200,000 in 2023, a pretty small number. These are estimates, Jim. So as we get through those that negotiated piece of the settlements, we'll be sort of updating them for you. But I think that's our best guess as of right now, small answer next year.

Okay. And then with Korea, when you go direct there, how many sales folks will you have in Korea?

Right. Day 1, we'll just have a general manager and an office manager and then also an RA person regulatory person, filing for more approvals. I would say by the end of the year, I don't know, pick a number, 2 or 3, mostly about Seoul and then later on getting out into other parts of the country.

And that's part of the 120 that you're hoping to get to by the end of December?

Yes.

Or is that in addition to?

You know what, I'm going to say, in addition to just as a on-the-fly answer, Jim.

Okay. All right. And then last one for me. Back to France, you said there were a couple of products there that you're not going to sell anymore, were they immaterial in revenue at all?

Yes. So there's -- there were essentially 3 product lines that we purchased with that acquisition. One was some biologic glue, which we no longer sell. The other is the valvulotomes, which we're going to continue selling now manufactured in Burlington.

And the third piece was Dacron grafts, and those, we have a bunch of inventory on that Jim, like 3-ish years, maybe more. And we'll sell that inventory out over the next years-ish. And then when we're done with that, we'll transition those customers over to our AlboGraft product line. If you remember that Dacron graft product line that we manufacture in Burlington.

Jim, the biologic blue device, the third one JJ referred to was a $600,000 device in 2021. It will have a little sales this year and zero in 2023. It's 1 of the 6 devices that I talked about with Mike Petusky that we're writing off. We're not interested in the future of that product line for its own reasons, having nothing to do with this factory transition.

(Operator Instructions)

And our last question -- we have a question from Javier Fonseca from Spartan Capital.

My question would be more in line with Artegraft. So obviously, it's been almost 2 years since the acquisition and still going strong. And as far as like the actual commercial presence for Artegraft, does management have any sort of expectation on timings for, as far as, like international rollout and to get Artegraft out there in foreign markets?

Sure. Javier, thanks a lot. It's a great question. In fact, we do, we are in the preparation stages to prepare our CE submission, and we think that CE mark submission will go in deep into 2023 and maybe we'll have an approval in like 2025 or 2024. But there's a lot of work that goes into getting that ready from where the product line fits right now. We started doing that. That's on all of our mission statements around all of our offices.

Excellent. And before getting to that CE mark, should investors expect any sort of increase in -- noticeable increase in R&D for this product line, given how well it's performed in the United States?

So in terms of development of the product, I think no, but in terms of all of the standardizing the processes and getting them up to snuff, I think there'll be a lot of R&D money spent on that, but not on a change to the product that the hospital would see.

Excellent. And I guess my last question would be, I think you said earlier on the call, and I might have missed it, but what was the actual dollar amount that Artegraft brought in for Q1?

$6.9 million, and it was an 18% organic growth rate over Q1 2021.

And there are no further questions at this time. And 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.