Welcome to the LeMaitre Vascular Q1 2020 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, Chris. Good afternoon and thank you for joining us on our Q1 2020 conference call. With me on today's call are our Chairman and CEO, George LeMaitre; and our President, Dave Roberts. For your information, due to social distancing, we are holding this call from our respective homes, so we apologize for any audio difficulties. Before we begin, I'll read our safe harbor statement. Today, we may make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast, and similar expressions. Notably, on April 13, we went through our 2020 guidance, which we issued on February 6. Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and the subsequent SEC filings, including disclosure and factors that could cause results to differ materially from those expressed or implied. During this call, we might discuss non-GAAP financial measures, which may include organic sales growth numbers as well as adjusted operating income growth, operating income, excluding certain one-time gains and charges, and EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call, if any, is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks, JJ. Today's prepared remarks will address four aspects of the current crisis: No. 1, LeMaitre's social distancing and work rules driven by COVID-19; No. 2, the operational impact of COVID-19; No. 3, the sales impact of COVID-19; and finally, No. 4, LeMaitre's financial response to COVID-19. After the prepared remarks, we'll open it up for questions. Today's call will not include Q2 or 2020 financial guidance. As for the first section, social distancing and work rules. In early March, we instituted social distancing measures at all of our offices and factories. All employees whose jobs can be done remotely were told to do so. We also transitioned production in our larger clean rooms to two shifts to reduce employee density. Our internal rules now forbid airline travel and sales rep hospital visits, though we have been making case-by-case sales rep exceptions as some states and countries open up. As is widely reported, most hospitals are not currently accepting visitors. The second segment would be the operational impacts of COVID-19. We began the crisis with $41 million of inventory, equating to 12 months on hand, and all four LeMaitre factories are generally operating at near-normal production capacity. But there are a few items worth discussing. As of this conference call, four of our employees are known to have tested positive for COVID-19, the last of which was discovered on April 22. Our response has been to temporarily shut our clean rooms and to reopen after thoroughly disinfecting. Our main Burlington clean room has been closed for a total of 9 working days since the crisis began. Also recently, we experienced somewhat elevated absenteeism in our main Burlington clean room, likely due to the high levels of COVID-19 in Massachusetts and our employees' understandable desires to stay at home. Including the government's Family First sick leave entitlement, our American employees can get up to 17 days sick time-off with full or partial pay. We also plan to reduce production hours by 70% in our French factory, based on the availability of a government furlough program there. We can reverse this at our election. So far, we've experienced no material COVID-driven supplier disruptions, though we are monitoring the well-chronicled situation at American abattoirs and acknowledge this as a potential supply risk for three products: XenoSure bovine patches, ProCol bovine grafts, and AlboGraft. Our CardioCel bovine patches are sourced from Australian abattoirs, where COVID-19 has had less impact. So far, we've experienced no COVID-19-related supply issues from the four abattoirs we work with in the U.S., New Zealand, and Australia. Additionally, we've had almost no logistical interruptions in getting our products from our four factories to our nine warehouses and then on to our customer shelves. Orders continue to leave our shipping docks daily, and cargo shipments to Europe and Asia continue to fly. The rise of European country-border checkpoints has also not materially impacted our delivery to hospital customers from our Frankfurt warehouse. The third section I'd like to discuss is sales and financial impacts of COVID-19 on LeMaitre Vascular. All things considered, Q1 was a nice sales quarter. The Americas were up 12%. EMEA, up 3%, and APAC was down 11%. However, beginning in mid-March, we began to experience significant revenue disruptions, which seemed to impact Southern Europe the quickest and the most. Our Italian sales were down 14% in Q1, and France was down 10%. Of course, we experienced revenue issues in China throughout Q1 with sales down 70%, but China accounts for only 1% of our sales. In total, we estimate a Q1 sales loss of between $500,000 and $1 million due to the COVID-19 crisis. We generally sell our devices into the countries of the G20. And at this date, most hospitals continue to focus on the COVID-19 crisis, deferring elective surgeries. Also, most vascular patients are older than 60, and it stands to reason that they will hesitate to enter hospitals in the very short term. But in the long term, we expect the lion's share of our procedures will return to the hospital someday, and most will return to get done. You can't put off forever an in situ bypass or a surgical graft to save your foot, and you will eventually need to have your carotid endarterectomized and patched to possibly avoid a future stroke when this happens and when countries and states decide to open up are quite unclear. Finally, the fourth section I'd like to discuss is LeMaitre's financial response to COVID-19. In response to the sales decline that we've already experienced as well as anticipated future sales declines, we implemented two cost-cutting measures. The first of these was a reduction in force. On April 14, we initiated a 51-employee layoff, which was a direct response to COVID-19. We had previously completed a 33-employee reduction in February 2020 as a more generalized belt-tightening. When these two reductions are fully implemented, we expect our total head count will be down by 84 or approximately 18% to 375 employees. Notably, our sales rep head count was cut by 26% or 29 reps, bringing us down to 83 reps when the reduction is fully implemented. The second measure was salary reductions. We have temporarily reduced base salaries through the end of 2020 for all employees earning over $40,000 a year. Cuts were progressive, ranging from 90% for me to 50% for Dave and JJ and then down to 12.5% for lower-paid employees. Employees earning less than $40,000 did not receive salary reductions, though their hours were cut by 10% in the transition to two shifts and 6-day workweeks. Salary reductions had to be different overseas due to local laws and government programs. We expect the net savings from all of these cuts should total approximately $13.5 million in 2020, which is about 14% of our total 2019 spending. That would include operating expenses as well as cost of goods sold expenses. We could also look at these cuts as 12% of our 2019 sales. There will be a natural activity base decline in 2020 operating expenses due to decreases in executive travel, trade show booths, sales rep travel and entertainment, and the like. We have not yet been able to quantify these savings. At March 31, LeMaitre had $30.6 million of cash and no debt. We expect that our strong balance sheet and continuing commitment to profitability should position us to withstand the economic effects of the COVID-19 crisis. With that, we'll ask Chris to open the call up to questions.

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

So, the reduction in force, are these employees considered furlough? And can they be called back when procedures resumed?

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

Okay. So you all have to hire these people back when demand gets back to more historical rates?

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

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

Yes. So the one big one was the closure of the Australian factory in Melbourne, and that's still going exactly according to plan. That facility we closed in late May, early June, and we will be building product for human use in Q3. So it's a big one. The other, not to confuse everyone, but the other Australian product, which is we're buying from a company in Perth right now, we're transitioning the manufacturing of that. And it's called CardioCel, and we bought the Admedus brand. That's transitioning to Burlington, Massachusetts. Jim, that's been slowed down a little bit because we can't build our clean room in Massachusetts because construction is not able to be done. But of course, the minute the governor signals all clear, we will keep building the clean room, and we'll continue with that transition. There's a third transition, you might be talking about it also, which is the Syntel and Python product lines coming from California to Burlington. They were part of that Applied Medical acquisition that we did a couple of years ago, and that is definitely still on course. We will be finished with that transition in Q2 or Q3 of this year.

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

We were trying to find a way to provide some insight into the cost cut, which amounts to $13.5 million. If you consider it as a percentage of our 2019 sales, it represents 12%. Alternatively, when viewed as a percentage of our total spending in 2019, it accounts for 14%.

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

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

I know you can't predict the timing, nobody can. But at some point, over the next 12 months, hospitals are going to want to do procedures because they're losing money. There's no reason to think that this business won't be there at some point, maybe late 2020 or early 2021, at some point.

Yes, Jim. In fact, one of the things I've discovered, we're all learning these, we're all bumping into these new aspects of the crisis. But on this point, I realized that the doctors really want to get back to work regardless of what's going on. They have a need to work. They like to work. They want to be in hospitals working. So I think there's going to be a lot of actors driving things back toward normality in the hospitals as the COVID-19 patients are dealt with. So yes, I agree with you.

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

Well, I mean that's a very long way away. So I think what we were thinking about right now is just get through this quarter, things are kind of coming at us in a rush. So yes, it may be something we do. It may not be something we do. I will say that in this reduction, we haven't withdrawn ourselves out of territories. We still have a bunch of American reps, a bunch of European reps, and a bunch of Asia Pac reps. So we haven't gone away from territories. They're just more thinly covered for now. So we'll see how that goes, and then we'll respond opportunistically.

All right. Thank you.

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

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

Right. Cecilia, we've debated a lot whether to get into the whole April thing or not because we've started seeing what April is like. And we've really felt like it's not appropriate to dig into April. So if you look at March, what happened in procedures, I mean I'm not distinguishing much between procedures and revenues. But you definitely felt that in the last two weeks of March. It was fairly obvious when it started happening. And then it happened in China the whole quarter. And then in Italy, we kept being surprised, we kept reading stuff in the newspapers that nothing bad was happening. And then all of a sudden, in the back of March, it started happening. So procedure volume was clearly dropping in Italy, France, to a certain extent Spain and then also the U.S.

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

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

Yes, Cecilia, that's a great question. From a competitive perspective, I believe the CardioCel product, along with VascuCel, is exceeding our expectations. In the fourth quarter, we performed better than anticipated, which led us to raise the full-year guidance for CardioCel and VascuCel to $7.1 million. In the first quarter, we recorded $1.9 million in sales of CardioCel and VascuCel, which annualizes to $7.6 million. This performance is better than we had expected. Competitively, we've found that it integrates well into our sales strategy, and our representatives are focusing on it. Additionally, during this unusual COVID period, many of the CardioCel products are utilized for congenital heart defects, and those procedures appear to be holding up well. Overall, the initial feedback regarding CardioCel at LeMaitre is encouraging.

Thank you both for the color.

Thank you. So our next question comes from Frank Takkinen with Lake Street Capital Markets. Your line is now open.

Hey. Thanks. I guess I have a couple of questions here. So I wanted to first start a little bit more broadly speaking just based on the LeMaitre business model. So the way I think about it is there's a diverse amount of products in a diverse of geographies. So therefore, I would feel that it fares slightly above average to some of your peers as you go through a time like this, where it's choppy, where some geographies do better than others, some products do better than others. Obviously, there's varying degrees of severity within their respective procedures as well. So I was hoping you guys could give a summarized view of how you feel you're going to come out of this based on what you've seen in the end of March compared to the early days of April, based on what geographies you feel are going to come back strongest and what products you feel are going to come back strongly to rebound coming out of this.

There's a lot to discuss, and I will try to avoid forward-looking statements. I appreciate your observations about LeMaitre's strong diversification in terms of geography and product line; it's a significant strength for the company. We understand that responses will vary across different countries, and we may receive early insights from some regions that will influence our strategies in others. We are enthusiastic about our diversification. It has been noted that Japan has been less affected, which is vital for us, as Japanese revenues account for about 4% of our total. We have also had success in Australia since 2013, and it appears that both Australia and New Zealand are positioned to perform well. Additionally, markets like Taiwan and Korea are generally optimistic. However, in several Western markets, there is uncertainty, and we all wait to see how things unfold.

Got it. And then in regards to gross margins, I appreciate that you've withdrawn guidance. But I know the original thought was that was something that could potentially trough in the first half of the year and then start to rebound into the next half of this year. So I was hoping you could give some anecdotal comments on different gross margin improvement initiatives and how it has been impacted by COVID-19 in regards to timeline.

Well, this is JJ. I can tell you sort of maybe the sequential story a little bit, and maybe that will help you. Obviously, when we're not giving guidance going forward. But maybe I can give a little color there also. So sequentially, we were up 1%. We do price increases typically at the beginning of the year. And so that helps us. And to the extent that you have lower sales in geographies with comparatively lower margins like China, you're going to have a tailwind to your margin. So in China, sequentially, I think we were down $350,000 or something like that. But it helped the margin 0.5% or more. We had a really strong RestoreFlow quarter in Q1. And so that conversely hurt the margin. Comparatively lower margins there, but more RestoreFlow sales are going to be $1 million or so more sequentially, I think. Maybe that's a little bit high but in that range. And so mix is a big part of the story, and it goes to your first question of what's going to change first and what's going to recover first. And that's really just tough to say. At a higher level, maybe I would say, as volume goes down, maybe you have sort of less variable or direct labor hours to amortize those fixed costs. So that's probably a little bit of a headwind, generically speaking, directionally. But again, that mix piece is certainly a pretty important part of the story.

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

Hey, guys. Good evening. Could you provide the growth rates for biologic patches, allografts, and valvulotomes for Q1?

So, Mike, valvulotomes were 11%. And when we look at patches, bovine patches were about 3%. And what was the third one you wanted?

Allografts.

Allografts.

Allografts were about 55%, a really nice answer in the allograft Q1.

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

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

Okay. All right. And then I guess the...

It would be, sorry about that.

No problem. So I guess then in terms of the cost cuts, I may have missed this. But did you guys speak at all about R&D, anything you're doing differently there as you move forward?

No. But if you're relating it to the cost cut, there's an angle on that question. In the quarter, oddly, R&D was 10% of revenues. So it's a high watermark for us. But maybe it's worth, I know you'd exactly asked this question. But maybe sort of digging into that, a lot of it is the MDR process over in Europe is extremely expensive. And the transferring of these factories that we've been doing for the last two years, which a lot of them, as we talked about, as Jim was asking at the beginning of the phone call, are sort of coming to a head right now. So there's a lot of transference costs. And I would say that's sort of two-thirds of that 10% of those two buckets. So a lot of money in R&D, not so much at what you'd think of as classic medical device research and development R&D.

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

And you mean adjustments downwards or more of a investment in R&D.

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

Well, a couple of the projects fell out when we made acquisitions in the same segment. And so a couple XenoSure-related products that we were going to do, like XenoSure 2.0, we didn't need to do. But no, not really. I mean I will say the layoffs hit the R&D department like they hit all departments. And I think, I don't know, four of 12 engineers were let go. So it's not like we have a lot of firepower in there. I do feel like we're in a whole different place in terms of we're circling the wagons, we're trying to figure out what this all means. And we're trying to rebuild a profitable entity in the wake of all this and see what happens then. And I think the R&D, the creativity of the R&D department probably goes down in the short run. But as a medical device company, you've got to have an R&D effort of some sort.

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

I mean I think you always have to be evaluating that. I would say it's an action that I hope you all look at and you go, 'Oh, well, listen to people's actions, not their words.' And it's an action that says, 'Hey, we feel good about where the Company is. We feel great about the cash position.' And I'd even add to that, we feel great about having $41 million worth of inventory, a lot of it, which is finished goods, which will turn into cash quickly. So when we first got into this a month ago, we all experienced a different range of emotions around the COVID thing. There was, 'Oh, my God' someday, and then some day, it was like, 'Oh, it's going to be OK.' And I think you start looking around going, 'What about the cash?' And so we feel really good about the cash, and I think that decision by the Board was made only two days ago. So the Board had all of these facts in front of them, and they still said, 'Hey, let's let $1.9 million of cash out the door in the form of a dividend.'

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

Yes. Mike, it's Dave. It's a good question. I do believe that I spoke with several docs a few weeks ago. And what was apparent was that the COVID pandemic was hitting different parts of the country at different times. And so again, this was a few weeks ago. But there were some cities in the Midwest which were still doing elective surgery, and then there were plenty of places like New York City or Boston where it wasn't taking place. So it's very regionalized and even down to specific cities, what's happening. And we've already talked about the types of some products continue to be used that are in more emergency situations like embolectomy catheters or CardioCel, even our allografts, whereas other products, the procedures may be getting deferred in regions where COVID is more prevalent like TRIVEX, for example. So it's sort of a patchwork all around the country and around the world, and that's what we're finding.

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

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