Welcome to the LeMaitre Vascular Q3 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.

Thanks Lawrie. Good afternoon and thank you for joining us on our Q3 2020 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, October 29th, 2020 and should not be relied upon as representing our estimates of use 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 the 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 non-GAAP outstanding debt. 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 on our website.

Thanks, JJ. On today's call, I'll review COVID's impact on our company as well as Q3 sales and profits. In light of the recent escalation of COVID, we must redouble our commitment to the health and safety of our employees. We now know of 12 employees who have contracted the virus, 10 have recovered, and we await word on the most recent cases. In addition to requiring masks and temperature checks, in September, we provided distance-sensing watches to all Burlington employees. The watches beep when employees are six feet apart, saving this information for future contact tracing. In Q4, we'll expand this watch program to our three other production facilities and our European headquarters. Perhaps due to these safety measures, we're currently experiencing no manufacturing or logistical issues due to the virus. 95% of our production personnel have remained on campus throughout and approximately 50% of our administrative personnel have returned. While elective surgeries have recovered for now, the job description of a sales rep has changed in the time of COVID. Access to hospitals and surgeons' offices has been restricted, visits often require an advanced appointment or invitation, and adherence to other safety measures like temperature checks. Like all of us, sales reps have leveraged available email and video technology, but there are limits to this. And with another COVID wave upon us, we expect rep access to continue to be challenged. As to our financial results, we posted sales of $36.4 million in the quarter, up 25% versus Q3 2019. Geographically, sales were up 37% in the Americas, 12% in Asia-Pac, and 6% in Europe. The three recent acquisitions; Artegraft, CardioCell, and Eze-Sit, and the return of elective surgery drove growth in Q3. These record sales combined with headcount reductions produced strong bottom-line results. We generated $10 million of operating income in Q3, EBITDA of $12.6 million, and EPS of $0.37 per share. With that I'll turn the call over to JJ.

Thanks George. Gross margin in Q3 was 62.3%, down from 69.3% in Q3 2019. The decrease was driven largely by Artegraft purchase price accounting, as well as manufacturing inefficiencies. We do expect to rebound to 65.5% in Q4 as Artegraft accounting normalizes Operating expenses in Q3 were $12.7 million, down 11% versus Q3 2019. The decrease was driven by reduced selling and marketing expenses, down 31% year-over-year. Fewer reps, fewer trade shows, and less travel drove the decline. Manufacturing transfer costs also declined as the factory integrations of Omniflowii and Syntel are completed in Q2. Operating expenses also benefited from a $470,000 gain on the sale of our recently closed Omniflowii manufacturing facility in Australia. It seems like Q3 has an operating expense low watermark and our guidance reflects this. We reversed COVID-related salary reductions on September 1st and we are cautiously hiring more sales reps. The newly acquired Artegraft product line is performing above expectations and generated $5.4 million in Q3 revenue and $950,000 of operating income. Our Q4 guidance includes the Artegraft sale of $5.6 million and an EPS contribution of $0.05 per share. We ended Q3 2020 with $34.4 million in cash, an increase of $9.3 million versus Q2 2020. The increase was driven by $14.1 million of cash from operations, $2 million from the sale of our Australian building, and $1.2 million in stock option exercises. This strong cash generation enabled us to repay $4.5 million of our Artegraft acquisition debt and we ended the quarter with a debt balance of $16.5 million. You may recall that we experienced CE Mark issues with some of our devices recently including Dacron grafts and bovine patches. We are pleased to report that in Q3, we received temporary authorizations allowing us to sell the grafts and patches for at least Q4 2020 in 12 European countries. Any impact related to this issue is included in our Q4 guidance. At the midpoint, our Q4 sales guidance represents an increase of 19% versus Q4 2019 and our Q4 operating income guidance represents an increase of 70%. At the midpoint, our Q4 EPS guidance of $0.30 per share represents an increase of 32%. With that, I'll turn it back over to Lawrie for any questions.

Hey, good afternoon, guys. Frank Takkinen on for Brooks this evening. Thanks for taking my questions. Just a couple for you here today. I was hoping you could tease out exactly the bottom end and top end of organic growth assumption. I heard your comment of $5.6 million expected from Artegraft, but I was just hoping you could help us have perfect clarity into kind of what you're thinking of from an organic growth perspective for Q4? Sorry, I was on mute there talking to myself.

No problem.

Yes. So, for Q4, I think we expect organic growth to be sort of low single-digit negative numbers, maybe 2% or so, something like that. So, an improvement from where we've been, but not quite yet positive numbers. And I think the full 19% growth is driven by the Artegraft and CardioCell acquisitions. And FX actually helps a bit year-over-year in Q4 as well by about 1.7%. Got it. And then on the second question, for gross margin, you guys have done a remarkable job of integrating your acquisitions and getting back to your corporate average in the high 60s; looks like you're well on your way with your guidance there for Q4. I was just hoping if you could provide us with a little more granular update on where you're at in the process with integrating Artegraft and getting your corporate margins back to where they have historically been for the fourth quarter, as well as anything anecdotally you can talk about for 2021?

Yes, so it's a great question Frank. So, the Artegraft inventory step-up piece goes away probably halfway through Q4. And so if Artegraft costs us 4.5% or almost 5% in gross margin headwinds for this quarter, maybe you get half of that back or so in Q4, and then fully back after that. So, that'll be a nice improvement for where we are this quarter. And then going forward, to the extent that we get integrations done and those integrations then start actually coming through the P&L, you'll start to see improvements. And obviously, we haven't guided on this, but the Omniflowii integration was recently completed and the Syntel integration was recently completed. And even those are done operationally, the inventory that we had previously made or purchased at a higher cost still hasn't all been sold out. So as those sell out, you'll get an improvement there as well. And so if you never did another acquisition, eventually you'd see us return to the glory days somewhere around there, if you look back in time, in terms of our gross margins. But I think we've been super active in the last couple of years with maybe five deals in that time. So there's a lot of integrating. Two of them are done. One of them is Artegraft pieces and it should fall away pretty quickly. And so I think that's sort of what it's feeling like going forward.

Got it. Perfect. Thanks for answering my questions and congrats on a solid quarter, especially given the backdrop. Good job.

Thanks Frank.

Your next question is from Rick Wise from Stifel. Your line is open.

Hi, guys. It's Drew Ranieri on for Rick tonight. Thanks for taking the question. First, just wanted to start on the salesforce for a moment. JJ, I think I heard you mention that you're potentially going to be hiring or lifting the freeze on hiring for sales reps heading into the back part of the year. But just kind of your thoughts on how we should be thinking about LeMaitre adding sales reps. I think you added some from the Artegraft acquisition and maybe how your guidance contemplates those adds in your operating income?

So, Drew, this is George, maybe I take that; it’s a little bit more in my corner here. So, yes, we have started hiring. This is new to us. We have about 12 requisitions up on the board right now. We'll see where we go. Obviously, we're watching closely what's going on in Europe for COVID right now and also in the United States for COVID right now. You just get started hiring and then something changes. So, it is a tough environment to predict where you're going to be in three months. It feels like the last call, July 23rd, was a million miles from now. But maybe as a band, I'd say we'd be up by five or 10 sales reps by the end of the year.

Okay. Could you tell me if you provided the representative headcount for the third quarter?

Yeah, it was 79.

Got it. And could you be a little bit more precise in terms of geography? Sure, of course, 35 in North America, 33 in Europe, and 11 in Asia-Pac. Got it. And then just kind of looking at LeMaitre over the past four or five years, sales rep productivity has held fairly stable, kind of as you look into 2021. I mean, how should investors think about LeMaitre's growth going forward in context of rep productivity, now that the salesforce is roughly 20% smaller than where you were at the beginning of the year? And the reps you're hiring now will need some time to be productive or to get to productivity levels.

Right. I think the whole question of rep productivity is the heart and soul of this whole thing for our company right now? How much can they get done right now? It's a big question. I don't think we have answers on it at LeMaitre Vascular, because everything's changed for the rep. They have a very difficult time getting into hospitals and doctor's offices. So, I honestly think that's so far away that I couldn't even put numbers on productivity. I would say we feel somewhat fortunate to have gone through the last six months with sort of employee-light, because we're nervous that reps aren't able to make as much of an impact as they used to. And I'm working on a hypothesis that brand switching in a time where reps can't really get into hospitals has been reduced. It feels like people are going back to their safety zones and just using the products they've always used, and I think you see that in our Q3 revenues.

Got it. And then just to be selfish one last question. Just on the procedure environment in general, obviously, there's some spikes in cases throughout the world. Just could you talk about what you're seeing so far, maybe in your October trends? And how that might correlate to your Q4 guidance range?

I believe the last part of your question is insightful. The first four weeks of October have influenced our guidance. We examined the summer quarter and the initial weeks of October, but I prefer not to delve too deeply into those details. There is plenty to discuss regarding the recently closed quarter rather than focusing on October.

Got it. Thanks for taking the questions.

Thanks a lot Drew.

And your next question is from Mike Petusky of Barrington Research. Your line is open.

Hey, good evening guys. So, George I guess I want to ask you sort of a bigger question. A lot of companies are starting to sort of share what they've learned during the past six or seven months of sort of a new normal or trying to adjust to whatever we're calling this un-normal times. Can you just talk about what you feel like you learned during this time in terms of your business? And I mean for roughly three years, you guys kind of had flat earnings and now in the most challenging of times, you're going to sort of break out of that, and most likely show some really nice bottom-line growth. Can you just talk about what you guys have learned and how that all sort of informed the future?

Sure. It might be surprising, but what we've learned isn't solely about COVID. The key takeaway from the Artegraft acquisition and our approach to using debt has been significant. Our understanding now is that we need to consider larger acquisitions, and we're becoming more comfortable using different types of capital. Historically, we've maintained a conservative balance sheet, so that's one of my main lessons from the first nine months. Regarding COVID, the company currently appears to be separating into two segments: sales representatives and managers, and everything else. On a positive note, in Burlington, it feels like we're getting back to business as usual with medical device production, ensuring quality, maintaining high inventory levels, and so forth. Like everyone else on this call, we're finding ways to adapt while feeling safe. In our five buildings in Burlington, and extending this to other factories at LeMaitre Vascular, operations are ongoing and precautions are in place. So far, we haven't seen any spread of the virus in our facilities. Initially, I was quite apprehensive about entering the buildings, but now many of us are returning; we've learned to navigate our surroundings effectively. However, sales reps face a different challenge as they need access to other people's buildings. In our Burlington facility, there's a sign that restricts access to only specific staff members, reflecting how hospitals are also limiting visitors. Overall, about 75% of our employees are returning to work normally, but it's more challenging for the sales reps. I believe I addressed the question from a couple of angles, and I hope you've gained some insight from my reflections.

Absolutely. Just one kind of quick follow-up on that subject. So, when you think about just on the sales rep side, I think at one time you guys may have been like 110, 115 reps or 112, some number like that. Can you envision even two years from now being back at that number? Or do you think that sort of what you've possibly learned on that side of things is maybe you don't need that level of salesforce?

We're currently navigating a lot of uncertainties. If a vaccine is scheduled for February and people are getting vaccinated, we will definitely return to normal operations. However, if it turns out the vaccine isn't effective and conditions worsen, we'll need to adjust our approach accordingly. You can expect updates from us every quarter. Right now, we feel we're slightly under capacity with 79 sales reps, compared to the peak of 112 last year. We currently have 12 job openings, and we're aiming to hire an additional five to ten reps. It's worth noting that we lost eight or nine reps over the summer, as many took the opportunity to look for new jobs while working remotely. This wasn’t a decision we made lightly.

Okay, great. Just a quick question for JJ. Did you discuss the main drivers for topline performance, specifically the major product categories like Valvulotomes, XenoSure, and Artegraft?

We may have touched on it. You're thinking year-over-year or are you thinking sequential?

Yes, year-over-year.

So, I mean, year-over-year, I would say the Artegraft piece is certainly an important part of the equation. Bovine grafts are up $5.3 million or something like that year-over-year, driven by the acquisition. And then the CardioCell acquisition actually helped a lot year-over-year as well reported by maybe $1.08 million something like that. So, that's probably your number two driver. And then Valvulotomes were up pretty sharply as well year-over-year, driven by the high growth, but also the Eze-Sit and price increases related to the Eze-Sit. So, it's been another nice acquisition story, really. So, those three acquisition pieces are really helping drive reported sales year-over-year.

What about Valvulotomes ex-Eze and then Xeno?

I think they were up decently. I can't remember the percent, maybe one of you guys can. But I feel like it was still a nice answer for the Valvulotomes business?

Mid-single digits.

Yes, 7% or 8%, something like that.

I think it was more, JJ. I think we had a really nice experience. I don't know the exact number. I think we had a really nice experience, particularly in Europe with the LeMaitre Valvulotomes.

Valvulotomes units worldwide were up 9%.

And Xeno? Is that a question in there? Sorry, we couldn't hear. Yes, no, I'm sorry. Yes, I may have missed it. But did you give us XenoSure year-over-year?

Yes, update on the trial is a little bit of progress, a little bit of better news on that trial. Because China has cleaned out their COVID problem, the follow-up, which was getting lost, the patients are being lost to follow-up in Q1 and Q2, the patients are now comfortable coming back to the hospital. And as a result, the cardiac trial now needs no more enrollees and is effectively done enrolling. And to give you a high level look at this, I would say the cardiac side was thinking about approval in 2023. We don't see roadblocks on the way there for the vascular side, which is a different side of the trial. We also have been happily surprised with the follow-up that's starting to occur. We do have a roadblock; we have an 85% chance that we'll be able to work our way around the roadblock. There's a question about the endpoints and about the redoing of the endpoints. So, we'd say 85% chance, yes, in 2024 and 15% chance, no, we will not be allowed to redo our endpoints for the Chinese FDA.

Great. Thank you.

Thanks a lot.

Thanks Mike.

Your next question is from James Sidoti of Sidoti & Company. Your line is open.

Hi, good afternoon. Can you hear me?

Yes, we can.

All right. So, just to be clear, I think you said Artegraft added about $5.4 million in revenue, but the total acquisition revenue was closer to $8 million, does that sound about right?

Yes, you're in the ballpark, total acquisition revenue about $7.6 million.

Okay. And then if you take the $5.4 million, you did this quarter, and then you did a couple of million in the June quarter, you're looking at about $5.6 million, I think you said for December. So, it sounds like you're thinking that Artegraft is going to add $13 million this year? Less than that, a little more than $11 million.

Yes, there's a couple of hundred in Q2; it's still a stub period. And then $5.6 million, yes.

But if I look at your operating income generated this quarter versus the interest expense, it sounds like it was a cleanup even in this quarter with the extra cost of goods sold.

Yes. No, it’s a good story, Jim. On an operating income basis, it added almost $1 million. When you got done with taxes and interest expense, it was accretive to a $0.01 a share.

So, I guess Dave can put this one in the win column right away.

He has already got it.

Not quite. But early days.

All right. Then, can you comment at all about the trends, July, August, September; did it get better every month in the quarter?

I can give you those numbers. I'm happy to. Organically down 7% in July, flat in August, and up 1% in September.

Okay. All right. And then the guidance in Q4, I'm impressed you're giving guidance at all with the current situation, but $34 million to $38 million, is the difference between the $34 million and $38 million what happens in COVID or are there factors in there?

Yes, there's definitely a COVID topic in there, Jim. And when I say we're thinking about guidance, we were like, okay, do we just still sort of status quo? Or do we assume a second wave? Or do we assume things get better? And I would say we probably erred on the more conservative side. But we'll see, and you don't know how that's going to turn out. And then there's a little bit of a CE Mark issue in there we're trying to figure that out. And then there's a seasonality piece in there. Usually, Q4 is better than Q3, but this odd year, I think we feel like some of Q2 sales got pushed into Q3. So, there was a sort of a nice answer and nicer answer in Q3, maybe that seasonality would suggest. And maybe that means a little lighter seasonally speaking from Q3 to Q4 for guidance. So, there were a lot of puts and takes going back and forth, big numbers too in the guidance. And we also talked about not giving guidance, because of all that, but I think at the end of the day, we felt like we'll just give you the best shot we've got. We'll try and figure out what we think it is and let you guys know.

Okay. All right. And you better not tell my wife about that six-foot watch thing, because she'd buy those in a heartbeat.

Maybe she doesn’t even need it.

All right. Thank you.

Thanks Jim.

And ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect. Have a great day.