LeMaitre Vascular Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 8 speakers on the call.

Operator

Welcome to the LeMaitre Vascular Q1 2023 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. J. J.

Operator

Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and thank you for joining us on our Q1 2023 conference call. With me on today's call is 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.

Speaker 1

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, May 2, 2023, 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 disclosure of the factors that could cause results to differ materially from those expressed or implied.

Speaker 1

During this call, we will discuss non GAAP financial measures, which include organic sales growth as well as operating income, operating expense 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.wilnate.com. I'll now turn the call over to George LeNate.

Speaker 2

Thanks, J. J. Sales grew 22% organically in Q1, 13% price and 9% units. Our 5 largest product lines led the way. Validatomes were up 29%, carotid patches increased 17%, bovine grafts 22%, Allograft 42% and carotid shunts 18%.

Speaker 2

By geography, all three regions reported growth. The Americas were up 21%, EMEA was up 17% and APAC was up 6%. At least on the Q1 sales line, it felt like we were in a new movie, Everything Everywhere All at Once. The growth was partially driven by the improving macro environment you've already heard about. Procedure volumes increased in Q1 As hospitals staffed up their ORs to pre COVID levels.

Speaker 2

But we also saw growth from 3 LeMaitre specific items: Pricing, a larger sales force and competitor stumble. In Q1, we realized a 13% price increase, Largely from our domestic valvatomes and European shunts. We also had 128 sales reps on March 31, 14% more than we did a year ago, and we plan to end the year with 135 to 140 reps. And finally, in Q1, we benefited from competitor stumbles, which came in 2 flavors, back orders and abandoned European MDR approvals. While many of the back orders have resolved, several competitors have withdrawn their products from Europe due to the high cost of gaining next gen CE marking.

Speaker 2

I'd now like to give an update on our continued expansion efforts in Asia Pac. Our new office in Seoul is up and running. Korea sales are trending above previous expectations and we should post the 2023 top line of $1,500,000 This is about double the historical sales volume to the ex Korean distributor. This subsidiary should also turn a small profit in 2023. Additionally, we recently agreed to buy out our Thai distributor and plan to begin selling directly to the Thai hospitals in Q3.

Speaker 2

This will be our 29th direct market. In other APAC related news, in Q3, we expect to receive Japanese approval For an additional XenoSure indication for use in the carotid artery. Our Q1 annual run rate for XenoSure in Japan is $1,900,000 So this additional indication could be meaningful. Currently, our Japanese sales force market XenoSure only for use in the femoral artery, Whereas worldwide usage of XenoSure is typically in the carotid artery. With that, I'll turn it over to Dave.

Speaker 2

Thanks, George. On April 20, we signed a 3 year agreement with Azeo Biologics to be the exclusive distributor of the cardiac patch product line in the U. S. With an option to acquire the worldwide business during year 2 or year 3. Excluding the initial inventory purchase, there is no upfront payment.

Speaker 2

2022 U. S. Sales of these products worth $6,800,000 We now have several patches in our portfolio, perhaps some clarification is warranted. XenoSure is a 1st generation bovine patch used primarily by vascular surgeons. CardioCell is a 2nd generation Azeo is a 3rd generation porcine patch Designed to be resistant to infection and to remodel into healthy tissue.

Speaker 2

Azeo is used primarily by cardiac surgeons. LeMaitre expects to record Azeos sales of $800,000 in Q2 and $3,800,000 in the full year 2023 with a 50% gross margin. With that, I'll turn it over to JJ.

Speaker 1

Thanks, Dave. Q1 2023 sales were $47,100,000 an increase of 19% on a Quarter basis and 22 percent organically versus Q1 2022. We're now guiding 15% organic sales For full year 2023, as we expect sales growth to moderate as hospital procedure volumes may begin to normalize. In Q1 2023, we posted a gross margin of 65.6 percent, flat versus the prior year period As average selling price increases and manufacturing efficiencies were offset by FX headwinds and unfavorable product mix. Going forward, the addition of the Azeo product line will decrease our gross margin by about 0.5%.

Speaker 1

We increased our direct labor manufacturing team by 54% in 2022. This increase in personnel has already helped us mitigate Issues related to the MDR transition, product line changes and supply chain disruptions. Training of this larger staff has driven inefficiency, however, which has hurt the gross margin, although we have begun to see improvement in this area. Gross margin guidance is 65% for the full year. Q1 2023 operating income was $7,900,000 reflecting an operating margin of 17%.

Speaker 1

Operating expenses increased 28% in Q1 versus the prior year. Much of the increase was due to higher selling commissions as Q1 sales significantly surpassed sales quota. In addition, we had 16 more sales reps versus the prior year and resumed our 3 regional January sales meetings. Regulatory costs were up 47% in the quarter as we continue working to obtain our MBR CE marks. We expect to slow the growth of operating expenses as we move through the year.

Speaker 1

Indeed, headcount of 591 was flat from December 31, 2022 to March 31, 2023. For the full year 2023, For guidance, please see our business outlook issued in today's press release, but a few highlights include Reported sales growth of 15% in Q2 and 18% in the full year, organic sales growth of 13% in Q2 and 15% in the full year, reported EPS growth of 103% in Q2 and 29% in the full year And non GAAP EPS growth excluding special charges of 10% in Q2 17% in the full year. With that, I'll turn it back over to the operator for questions.

Operator

Certainly. Please stand by while we compile the Q and A roster. One moment. And our first question will come from Matthew Mishan of KeyBanc. Your line is open.

Speaker 3

Hey, guys. This is Brett Fishman on today for Matt. Just wanted to start quickly on the quarter. You definitely touched on 3 of the Key drivers at a high level, driving some of the outperformance on the top line. Just wondering if you could expand a little bit on what you were seeing Specifically in the Americas and EMEA, maybe around like what type of procedural trends took a step up versus expectations?

Speaker 3

And then like maybe where else you were just surprised versus the outlook coming into the year?

Speaker 2

So Brett, this is George. Thanks for your question. Actually, You guys, the KeyBanc team sends around a fantastic report about the credit card swipes that take place in these hospitals. And when we looked at that, I think it sort of says it all. There was 14% more key bank credit card swipes in Q1 In USA Hospitals, if I got this right, you're welcome to correct me by the way since you sent the data out versus Q4.

Speaker 2

So it was a very strong sequential change between Q4 where we sold $41,000,000 medical devices in Q1 where we sold $47,000,000 worth of medical devices. And again, I think we're 68% Americas. So this is where it happens for us. And I think your data captured a lot of what's happening. The hospitals are open for business and doing procedures.

Speaker 3

All right. That's really helpful. And then I was also just looking ahead at the guidance, a pretty nice step up. It seems like to me a lot of the upside in 1Q might have been driven by volume just based on how you quantified it, maybe some upside on the price side as well. But is that something that you expect to continue in terms of what's driving the increasing guidance?

Speaker 3

Like are you seeing are you expecting an uptick In actual volume versus the initial outlook?

Speaker 1

Yes. So, I think for the full year, if you're Thinking of the drivers, the pricing topic probably sticks with you in one form or another. It may not be 13% quarter in and quarter out. There's a mix issue underneath that. That seems particularly robust to me.

Speaker 1

So Maybe it's not quite that, maybe it is, but we'll see. But the hospital procedure piece, I think we're assuming that there's going to be Some return to normalization over time, so there'll be a little bit of a step down in that. Maybe there was a backlog topic in Q1 And you sort of worked through that in Q2 and Q3. So elevated levels still, but not like you saw in Q1. And then the 3rd piece for the full year is the Azeo distribution agreement.

Speaker 1

So, dollars 3,500,000 to $4,000,000 of Sales may be coming from that in the year. So I think those are your big chunks as you think of guidance for the full year.

Speaker 3

All right. Really helpful. And then actually last question just to clarify the point. I know there was a little bit of Tailwind expected from some of the Omni Flow back orders and you thought that it would be resolved by the end of 2Q. So could you possibly like quantify how much of a tailwind that This quarter, if you still and if you still expect it to go away next quarter?

Speaker 3

Thanks very much.

Speaker 2

Sure. Thanks a lot. So Omniflow grew year over year in Q1, 1% on a reported basis and 4.8% on an organic basis. So a little bit of a year over And then specifically on the back order, things are improving. I would say largely, we're still holding to that Estimate that the back order will be cleaned largely by the end of Q2.

Speaker 2

But for some real facts here, approximately at the Beginning of this year, we came into the year with $800,000 in OmniFlow backorders and we ended Q1 With $400,000 in back order, so we'd help we pushed an extra $400,000 through that to cut that back order. But again, To go year over year here, it was up 1% reported. So what didn't really help us at all, but it was nice to not be suffering like we were in Q4.

Speaker 3

All right. Thanks very much. I think that probably clears up that not too much of the beat was driven by that or anything one time. Thanks again for taking the questions.

Speaker 4

Thanks a lot.

Operator

One moment for our next question. And our next question will come from Rick Wise with Stifel. Your line is open.

Speaker 5

Good afternoon, everybody. Apologies, George, I am juggling Three calls tonight and I missed the very start of your comments. But I want so maybe you commented on it, but I wanted to touch on the sales force. You You had 131 reps at the end of the year, you have 127 this quarter. I assume just normal attrition, but what are your thoughts about this year?

Speaker 5

And Do you have the right number? And if this is the right number, does that suggest all things equal, and I appreciate there are a lot of moving pieces here, Maybe a little more operating leverage as the year unfolds.

Speaker 2

Right. And so one of the things that we're saying here, Rick, is We have 128 reps right now. We had 131 at the end of the year. And we continue to plan to be around 135 to 140 For the year, so there's still, let's call it 7 or 9 more reps that will be sitting on the P and L by the end of the year. So If we're looking for leverage, I don't know if we'd get it there, but that's not that many.

Speaker 2

What's that's an addition of, I don't know, 7% or 8%, If that's part of your question, I mean, we do have op margin keyed in for the year at about 18% And I think for the guidance and I think we posted a 17%, am I doing that right, in Q1. And so Rick, and short answer to your question, there's a little bit of leverage here. The other key fact here I think that we wanted to focus on is that We ended the year with 5.90 employees. And at March 31, we only had 5.90 employees also. And so The slowing down of headcount growth, not just reps, but all headcount, really began about October, November of last year.

Speaker 2

We stopped approving Hiring requisitions largely. And so we're slowing down and I think we're knowing we need to get better leverage at the end of the year Then what you're seeing in the Q1 report.

Speaker 5

Got you. And maybe a question for Dave. Dave, you that was a Great quick and certainly clarifying perspective on the patch, 1st, 2nd, 3rd gen. And I'm clearer now about the Azio Patch opportunity. Can you give us some clarity on The potential opportunity and what you think you're going to be able to do with the product, maybe that hasn't been done or just is it About you have more reps, you can be more effective.

Speaker 5

Just any more color there that helps us appreciate better appreciate the opportunity?

Speaker 4

Yes, sure, Rick. Thanks for the question. Azeo had was selling these patches primarily through their On relatively small to LeMait direct sales channel, of maybe about a dozen or so reps, Plus, they had a handful of independent agents, but that channel was selling primarily a different and very interesting product they have, which is used in EP, which is a biologic pouch. And so really for them, it was a strategic choice to Focus their sales team's efforts on that product. So they were looking for a home and they recognize that LeMaitre has a relatively large sales force in the United States.

Speaker 4

We have 64 Sales reps in the Americas, probably about 58 or so U. S. Salespeople. And of course, we're very familiar with the Patch space with XenoSure and CardioCell selling both peripheral vascular and cardiac surgery patches. So We just felt like it was a really good combination.

Speaker 4

It's a very interesting patch. When it's implanted properly, it resorbs in the body, which can have a lot of benefits, and neither one of our patches does that. So It's a very good fit, and we're very pleased to have signed a distribution agreement we have an option to acquire that you're aware of. And Yes, we're excited to see where it goes.

Speaker 5

And does this deal in any way preclude you from pursuing Other M and A, I know that you're always anxious to share with us your specific plans.

Speaker 4

No. I mean, well, first of all, the transaction is complete now. We We actually didn't put any upfront cash into the deal. So it didn't really affect the balance sheet at all. In fact, We expect it to be accretive as we've described.

Speaker 4

And so if anything, it should improve our balance sheet for future deals. Something that's interesting is it came with a fairly large number of customers, which always is good in terms of When we do future acquisitions, having more cross selling potential. And frankly, The deal, it was very straightforward, so it didn't absorb an inordinate amount of bandwidth. And so the answer is We're out there hunting just as we were before this deal, and I don't think it slows us down at all.

Speaker 5

Great. And just the last one from me. Just maybe a little more commentary on thinking about the growth that we saw in the quarter, Sort of the volume versus price versus the procedure recovery aspect of things, especially to what extent did Price helped you out in the quarter overall?

Speaker 2

Sure, Rick. Yes, it was pretty straightforward. Price was 13% and unit growth was 9% To make up that 22.

Speaker 5

Got you. Thank you so much. Nice to see the strong start.

Speaker 2

Thanks a lot, Rick.

Operator

And our next question will come from Michael Petusky of Barrington Research. Your line is open.

Speaker 6

Good evening, guys. Strong quarter. Well done. I guess, let me start. Dave, is there a risk that the That the Azeo business in any way cannibalizes CardioCell or other business that you guys have?

Speaker 4

The Azeo patches are primarily cardiac patches. And as you Pointing out CardioCell is also, but as we negotiated with Azeo on this, they fully understood that. So Obviously, I think the key idea is when we have a customer and a current customer is using CardiCell Or a new current customer is using a Zio, then we're going to support those customers with the current products. Of course, There are a lot of customers out there who are using neither. And so for us, it's just extra optionality for our sales reps to present to those, Specifically, cardiac surgery customers.

Speaker 4

So I don't really see it as a conflict. I see it As additive to the bag and like I said, we'll be supporting each set of customers going forward.

Speaker 6

And I guess possibly George, but anybody wants to weigh in on this. The Valviatal, it's a mature product category. To get 29% growth on that is just sort of stunning to me. Can you guys describe, I guess, price was a big part of it, but I guess, How were you able to raise price on this type of product in at this point its life cycle? I mean, had it just not Had an increase in a while or was there an innovation?

Speaker 6

Can you guys just speak to what's underneath that 29%?

Speaker 2

Sure. So a couple of things. Maybe I go at units first. And as you're pointing out, it's mostly price, but still there's some unit action here too. You remember that January of 2022 was an Omnicron.

Speaker 2

It was sort of the last gasp of Omnicron. And so Q1 2023 versus Q1 2022, you're getting sort of a little bit of a lift. I don't know what it is in 29%, I can't even guess, maybe it's 5% or something like that because January of 2022 excuse me was so weak And January 2023 was normal. So you get a little bit of that. So there's some of that.

Speaker 2

But even if you look at the Q1 units and you annualize them for valviotomes, We are seeing something like and I don't have the number with me here, but it's I think it's something like a 5% or 8% annualized Unit growth rate on valvatomes versus last year, that's not very typical. We don't grow them that much. One Possible reason is there was a really important study published in December, although I don't know that this is true, this is just a possibility called BEST CLI and best CLI is coming to the surgeons and the radiologists and it's saying and the cardiologist and it's saying This bypass that you do with a valvatome is usually more durable than putting stents and using angioplasty balloons in bodies. So it's a very big study, it was published in the New England Journal of Medicine, very important study for us. Maybe that's helping out.

Speaker 2

And then so there's a couple of answers there. I know I'm not it's not perfect here, Mike. But then finally on the pricing, we bought The EZ site valvulotome in 2019 and we finally this year going into this year, we finally said, you know what, it's too complicated For the customers to see one price on the easy site and one price on the old LeMaitre valvatome, so they're all the same now. And so I would say that was So the key pricing move was to just bring the 2 of them to the same level to de confuse anyone about what the price of evaluatone was. So it was a hefty price increase for that reason.

Speaker 2

But I agree with you when you're supposing, wow, it's late in life, what happens? Maybe this is a validation of LeMaitre's niche business plan. We try to be number 1 or number 2 in these markets and there's not that many competitors Hanging around and we do feel like we have some pricing power in some of these product lines.

Speaker 1

Mike, I can give you some more detail and numbers From my private reserve that George hasn't seen. And so in Q1, it was up 29%, 19% was from ASPs from a price hike, and so 10% I guess units. And then, of that, if you split it between the EZ site and the hydro, The EZ site was really the bulk of the increase, 30 plus percent increase, hydro sort of in the normal range, High single digits kind of answer. So it really came from that EZSite piece and 19% of the increase was ASPs for valvulatomes in particular.

Speaker 6

Awesome. And JJ, while I've got you, I didn't catch, I heard the $800,000 in Q2, but I didn't catch the full year Zio contribution?

Speaker 1

For the full year, we're sort of baked into our guidance is about $3,700,000 $3,800,000

Speaker 6

Okay. Last item, I guess. Just because you guys have these building cash and Included in that is marketable securities. What's your assumption, I guess, on interest income For the remainder of the year or by quarter, however you want to break it out. And also, I'm just curious, tax rate still roughly 24.5%, 25% has that Hold up.

Speaker 6

Thanks.

Speaker 1

Yes, 24%, 25%, depending on who's exercising options, it will be lower if you have more. And our normal sort of ETR operating, if you will, is sort of $25,500,000 So if nothing weird happens, you're sort of at that level. For interest income these days, Mike, we're kind of at $600,000 or $700,000 a quarter, something like that, Probably closer to 700,000 these days.

Speaker 6

So there's no unusual items. You're doing more than $500,000 on that line going forward a quarter.

Speaker 1

Yes, that's right.

Speaker 6

Outstanding. Thanks guys. Really impressive start. Thanks.

Operator

And one moment.

Speaker 2

Thanks Mike.

Operator

One moment for our next question. And And our last question will come from Scott Henry of Roth Capital. Your line is open.

Speaker 7

Thank you and good afternoon. A couple of questions. For starters, I always like to ask, could you give me the mix between biologics and non biologics?

Speaker 2

49 Percent Biologics.

Speaker 7

Okay, great. Thank you. And then just as a follow-up To the conversation you just had on Valvula Tomes, with regards to price increases, and if we think about price increases in addition to inflation, Excess price increase, how much room do you believe you have for your product lines on pricing? Do you get much pushback? Does it vary?

Speaker 7

Just how should we think about the sustainability of being able to put through price increases beyond inflation?

Speaker 2

Okay. That's a good question. And I think your question would be even more full if you said depending on when you do this because Right now in December January February just that we came around the corner of the year, very little pushback on everything we did. And I was just Visiting our European subsidiaries last week and the European reps who are very conscious about price hikes We're making remarkable statements to me like, George, no one cared. It didn't matter.

Speaker 2

They're so nervous about not getting supply From the manufacturers that they're just happy you're talking to them right now. So I think the supply chain dynamics And then also the external inflation in Germany of 10%, let's call it, those two things conspire to When you put a 13% price hike at these hospitals right now, at least for now, they're not blinking. Now I hadn't 2 years ago, 4 years ago before all this, That was not the case. And we have this chart in our online PowerPoint presentation about the company Where we call out these price hikes and I think we did 13 in this Q1 and then you guys helped me out 8 or 9 in the last 2 years Before that and you got a little bit more pushback 2.5 years ago, but nothing right now.

Speaker 7

Okay, great. Thank you for that color. That's helpful. And then just on the model, a couple of numbers. I noticed G and A was a little bit above trend.

Speaker 7

And then when I look at sales and marketing, I usually calculate expense per rep, which was a bit higher than it's been in the past. Are those trends or is that noise, just how should we think about that?

Speaker 1

Yes. So in the quarter, you're asking year over year, I think, Maybe that language. G and A up 9% year over year. I'd say a few more hires, a few more employees, And then COLA's cost of living and salary increases year over year. And then more T and E, we're definitely traveling more, I think, generally speaking.

Speaker 1

So I think that's what's driving that 9% growth. And then selling and marketing up 39% year over year and That's a number of things. One is, as George was talking about, more reps, 16 more reps year over year. But also commissions We're significantly higher in Q1 than sort of year over year or run rate or however you want to look at it. And that obviously goes hand in hand with the higher sales.

Speaker 1

So quotas for sales reps were made back in October, November, December And Q1 turns out to be a fantastic quarter, cases are up, and so commissions are way up as well. And so That piece of it, that will stay high. If the sales piece stays high, that hospital backlog or Case surge stays high and it will come and normalize if it comes down. So we'll see. And then the other piece in Q1 is the sales meetings.

Speaker 1

We have Typically, historically done, annual sales meetings in January for the Americas, for Europe and for APAC. We were off last year, but we were on this year. And so that's a decent number for the year over year comparison.

Speaker 7

Okay. Great. And the final question, when I look at the Azio transaction, I mean, it looks just like the type of deal where you want to try out the product for a couple of years and if everything looks good, you buy this. And obviously, you have the options. I mean, is that a fair way to think about it?

Speaker 7

If this is as good as you hope it is, that this is something you would want The entire thing and this is more of a process to understand the product better and to get a little more sharpened pencils on the transaction.

Speaker 4

Yes, Scott. We've been familiar with this product line for a while, but of course, you never get a perfect due diligence look. And so for us to have it in our own bag and be selling it ourselves in the United States is just A really good way to try before we buy. So that's exactly what it is. And if we do exercise the option, I imagine, As we talked about, it was $6,800,000 of revenue in the U.

Speaker 4

S. There's a little bit OUS, but it would be The 3rd biggest acquisition LeMaitre would have done or if it grew, it could be the 2nd. So, it's not Small for us. Of course, we have our sights set on larger transactions going forward. But no, this is a nice sized transaction, sort of a Perfect drop in for LeMaitre, except this time we get to try it out before we buy it.

Speaker 7

Okay, great. Thank you for taking the questions and Congratulations, really strong results.

Speaker 4

Thanks a lot, Scott.

Operator

One moment. I am showing a follow-up question from Michael Petusky of Barrington. Michael, your line is open.

Speaker 6

Yes. JJ, rather than texting you later, I was wondering if you

Speaker 1

could Well, I'm driving.

Speaker 6

Exactly. I want to keep Stock based comp CapEx and cash flow from ops?

Speaker 1

1.290 for stock based comp, 1,290, Appreciation and amortization, dollars 2,351,000 and CapEx, dollars 2,130,000 1,000,000

Speaker 6

I'm sorry, did you give cash flow from upside? You cut out there for a second.

Speaker 2

2.28

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LeMaitre Vascular Q1 2023
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