Welcome to the LeMaitre Vascular Q3 2023 Financial Results Conference Call. After the speaker’s presentation, there will be a question-and-answer session. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Operator. Good afternoon, and thank you for joining us on our Q3 2023 conference call. With me on today’s call is our 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, November 1, 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-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, 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.lemaitre.com. I’ll now turn the call over to George LeMaitre.

Thanks, J.J. Q3 was an excellent quarter. Q3 was similar to Q2 on the top-line, with 16% organic sales growth. But it was better on the bottom line. Throughout the year, we’ve gained control of operating expenses. Spending growth was 26% in Q1, 19% in Q2, and now 14% in Q3. As a result, operating income grew 49% in Q3, and EPS was up 36%. Reported sales growth was 21% in Q3, spread across all geographies. APAC was up 30%; EMEA, 24%; and the Americas, 20%. By product, bovine patches were up 22%; valvulotomes were 27%; bovine grafts, 15%; and carotid shunts, 24%. Our bovine patch and carotid shunt businesses continue to excel in Q3 as key competitors have left the market. Valvulotome growth might be due to the recent publication of the BEST-CLI trial, which showed superior results of vein bypass versus stents, angioplasty and endarterectomy. Hospital procedures remained elevated in Q3 as the 2023 return to hospital continued, and our January 1st price increase has largely been accepted. During a time of high inflation, supply chain disruptions, and the CE mark transition, hospitals are now more attracted to our longstanding no-back order promise, and price might have become a secondary topic. Our 16% organic sales growth in Q3 was 11% price and 5% units. Feedback from the market and our growing international presence also helped. We ended Q3 with a record 136 sales reps, 15% more than a year ago. We generally have posted higher sales growth rates internationally as we continue to enter new markets. LeMaitre’s new Bangkok office opened in August, and we began selling directly to Thai hospitals. We also opened a new expanded Madrid office in September, and now we’re planning a French sales office for H1 2024. France is our 6th largest market. For a company with a French name, it’s a bit odd that we’ve never had a dedicated French sales office. Paris will be our 14th sales office, and we will now be able to serve the 5 largest European countries with dedicated customer service reps in their country and languages. Previously, our European customer service reps were centralized in Frankfurt. This re-localization of customer service tightens our hospital relationships and likely increases sales. Important regulatory projects underway include our Artegraft and RFA filings in Europe as well as our two Chinese XenoSure filings for cardiac and peripheral. It’s likely that all four of these filings will be at their respective regulatory agencies by H1 2024, and I would expect approvals 2 years after that. In H2 2024, we’ll also follow for Artegraft approval in Canada and Australia. These filings are in addition to the MDR CE transition in Europe. As you may know, Brussels has extended the MDR deadline to 2027. We have approximately 17 product categories needing this new CE stamp or letters to file, so this is a considerable undertaking. To conclude, 21% sales growth in Q3 and 49% operating income growth resulted from price increases, restrained operating expenses, and the continued return to hospital by patients and staff. Our profitability and $97 million of cash on hand provide safety and strategic optionality. With that, I’ll turn it over to J.J.

Thanks, George. As George noted, operating expenses in Q4 2023 were up 14%, and operating expense growth has slowed from 20% to 25% in H1 to under 15% in H2. If the sales force ramp and post-COVID re-hiring was our mantra in 2022, it’s safe to say that hiring restraint and cost containment has been our 2023 theme. We had 450 employees at the end of 2021, 591 at the end of 2022, and now 613 at the end of Q3 2023. One of our notable internal goals throughout 2023 was to finish the year with fewer than 625 employees. This target seems achievable. Increased sales and cost constraints have improved the bottom line considerably. In Q1, operating income growth excluding special charges was 3%; it was 8% in Q2; 49% in Q3, and now we’re guiding 44% in Q4. In Q3, we posted a gross margin of 65%, up 80 basis points year-over-year. The increase was driven by average selling price increases and direct labor productivity improvements. The benefits of a larger and more efficient manufacturing team are starting to come to the P&L. In retrospect, our 2022 manufacturing hiring surge was well-timed with the global return to hospital of patients and staff. Units are up and back orders are down. Cash at the end of Q3 2023 was $97 million, an increase of $6.8 million in the quarter. This increase was driven by cash from operations of $11.8 million, which is partially offset by dividends of $3.1 million and capital expenditures of $1.1 million. For guidance, please see our business outlook issued in today’s press release. But a few Q4 highlights include: reported sales growth of 20%; organic sales growth of 16%; operating income growth of 44%; and EPS growth of 43%. This $600,000 upward revision to our Q4 operating income guidance is largely due to an improved gross margin and tighter expense control. Separately, we have lowered Q4 sales guidance by $1.5 million due to three topics, which have evolved since our last guidance: the strengthening dollar, RestoreFlow output constraints, and the continued U.S. export ban on sales to Russia. And finally, I would like to welcome two new analyst teams to the LeMaitre story. In September, Suraj Kalia and Shaymus Contorno from Oppenheimer initiated coverage. So, in October, David Turkaly and Danny Stauder from JMP initiated coverage. Thank you to both teams, and we look forward to working with you. With that, I’ll turn it back over to the operator for questions.

Thank you. And our first question is going to come from the line of Brooks O’Neil with Lake Street Capital Markets. Your line is open. Please go ahead.

Thank you. Good afternoon, everyone. Congratulations on a terrific quarter. I’m curious, I guess I’d like to ask David, if you don’t mind, if he could comment at all on the M&A environment. It seems to me like the cash balance is robust and perhaps some of the challenges that are affecting the world may be freeing up some tasty morsels from some of the big medical companies out there with whom you talk. Any update would be helpful? Thank you very much.

Hi, Brooks. And thanks for the question. Yeah, obviously having a building cash balance is very helpful. In the quarter, we increased the cash by $6.8 million, and we’re up to $97 million. When you combine that with our over $40 million of EBITDA, it gives us a pretty big war chest to go after acquisition. In terms of the environment, I would say, of course, valuations are down. They’re up about 20% since our last call on August 1. Small and mid-cap companies, as you know, are trading at less than 3 times EV to next 12-month sales. So in terms of public multiples, the valuations have come down. I think it always takes private sellers a little while to digest and get the email. But, yeah, so that’s the environment in terms of targets. I would say we’re continuing to stay disciplined, focusing primarily on targets in the middle of the fairway, which are these open vascular targets with more than $5 million to $10 million of revenue. We like these niche open vascular markets. But we have been hunting adjacently, I’d say probably more a little bit in the cardiac surgery market. And we have ongoing discussions at various stages with different potential sellers. So, we’re out hunting. We know it’s been a little while since we’ve done an acquisition, a little over 3 years. But we’re waiting for a deal that we feel really good about that deserves our capital. So, we’re out hunting, and at some point you’ll see something pop out of the toaster.

Great. Thank you very much. Congratulations again on the terrific quarter.

Thanks, Brooks.

Thank you. And our next question comes from the line of Michael Petusky with Barrington Research. Your line is open. Please go ahead.

Hey, good evening. And J.J., sorry if you mentioned this, I did not catch it. Did you mention cash flow from ops in the quarter?

In the quarter, it was $11.8 million, if I recall. Let me check that, Mike. Yes, it was $11.821 million.

Okay. All right. Great. And let me just follow up on Brooks’ question around M&A real quick. Dave, obviously we’re hearing more targets, more attractive targets, but also the cost of capital is materially up as well. So I’m just wondering how you guys, how you MBAs think about the cost of capital and especially what that means for larger deals. Obviously, your balance sheet and cash flow support, smaller or maybe even mid-sized deals, but you guys have repeatedly suggested, ‘Hey, we had great success with Artegraft, more than open to larger deals.’ How does the cost of capital and larger deals sort of compete to you guys at this point?

Yeah, I would say obviously the cheapest form of capital is the cash on the balance sheet. If we’re near $100 million in cash on the balance sheet at the moment, we probably have $80 million of dry powder. And when you put that in the bank and earn a 5% money market return, it’s not that expensive. So I would say, of course, we’ll use our cash first. Secondly, absolutely debt is more expensive than it used to be, but it’s cheaper than using our own equity. And so we go to that next. As I mentioned, the EBITDA is north of $40 million, and probably you get to easily borrow 3 times that, excluding pro forma EBITDA. So we normally do accretive acquisitions. And so the borrowing capacity could be higher. Of course, in this environment, we’re not going to over-leverage the balance sheet. And then, I would say third, and I’ll let J.J. add any color when I’m done on this, third would be issuing equity that would have to be a much larger deal. Of course, our resolve would have to be much, much higher. There are deals out there where I can picture doing that. There aren’t that many, but there are some. So that for me, I guess, would summarize the pecking order of how we would access capital to do larger deals.

Okay. Great. And I guess, George, you mentioned that some key competitors have left some markets in which you guys compete. Could you sort of tease out whatever details you’re willing to share there? Thanks.

Yeah, of course. And one of the – they’re both sort of old stories here. Maybe one is a year-and-a-half old, maybe one is half-year old, but Becton Dickinson has completely left the shunt market over in Europe. Dragged down by Europe, they’ve done it for the whole world. So they’re out of the shunt market, and I would say they were either the key competitor or the second competitor over there. So our market shares over in Europe and shunts are now approaching 70s, 80s, and 90s in the various countries over there. And then in the bovine patch world, we’ve had one Canadian company, BioIntegral, taken off the market. They could not re-up their CE marks, and then Abbott has left the large patch, more the cardiac patch market. That is providing significant growth rates for us in our cardiac patch market. That product line for us is called CardioCel. You’ve heard us talking for years about the product, XenoSure. That’s more the peripheral patch, and CardioCel is more of our cardiac patch. And of course, the new Aziyo patch is also a cardiac-type patch.

And since you mentioned it, before I jump off the Aziyo partnership, I mean, how have you guys now, I guess, been involved in that at least a couple of 2, 3 quarters? It feels like, how is that working out? Any commentary just around that relationship? Thanks.

Yeah, Mike. It’s Dave. I’ll take that. I’d say it’s going fine. The sales are probably running a little bit less than what we provided as guidance on the last call. I would say that, as we look here over the next couple of months, at the moment, our North American, our U.S. sales organization is compensated really outside of their quota system on this patch, and starting in January, the patch will be included in their quota. So we’re sort of interested to see how that affects the revenue. Let’s see how that affects or doesn’t affect that revenue. But the good news is, we’ve got 6 months at least to think about whether we want to acquire this. But the soonest we could exercise that option would be in April of next year. And as I learned way back in business school, you should never tell a live option. So we’re thinking about this, right? And then, if we do exercise it, it would certainly be accretive, right? And so, it’s something we’re paying very close attention to. But at the moment, I know you’re not asking this. We don’t have further thoughts about whether we would exercise it or not. But, yeah, I would say it seems to be going well. One spin-off benefit is, as George mentioned, it’s used mostly around cardiac surgery. We picked up a lot of customers, a couple of hundred customers, which has helped us actually sell some of our other cardiac surgery products. So there are some nice spin-off benefits occurring as well.

Okay. Terrific. Thank you.

Thanks, Mike.

Thank you. And one moment as we move to our next question. And the next question is going to come from the line of Jim Sidoti with Sidoti & Company. Your line is open. Please go ahead.

Good afternoon, and thanks for taking the questions. The first one, a lot of talks in the last few weeks about Ozempic and the other GLP-1 drugs, and its impact on some other names. Are you seeing any impact on your business?

Hey, Jim, thanks for the question. It’s George. No, clearly not at this time.

Okay. And do you expect any impact over the next 2 to 3 years?

I mean, it’s a long thing, and there’s still a lot more to learn about that. My sense is, our answers won’t really add to this, but I’m happy to run through some stuff. We knew there’d be questions on GLPs, so if you want, I can give you a little blurb on sort of where we came at. Would you like that?

Sure.

Okay. So, I guess the recent 20% major adverse cardiovascular event reductions from GLPs, these headlines really got some attention on Wall Street, the elephant in the room in most of these medical device conference calls. I don’t really know how much J.J., George, and Dave are going to add to your folks' understanding of this, but we’ll take a swing at it. To start with, before we get into this, of course, everyone here is rooting for ways to reduce cardiovascular disease. I’ll call it CAD and PAD just for brevity here, but our take is that any GLP impact on CAD or PAD revenues seems very uncertain and very far away. This 20% headline, which is I think what most people are taking away from this whole thing, quickly turns into a 6% a year headline because those events, the 20% events, right? The major adverse cardiovascular events, we’ll call them MACE if you will. They took place over 3.3 years, so if it’s a 20% reduction, that’s pretty quickly turned into it. If you’re looking at the revenues of a company, you probably want to mark that down to 6%. And then you get that down to 4% because one-third of those events are death by heart attack. And, of course, I hate to get technically or a little grubby, but if we can manage to prevent death, it’s a great outcome for both the patients and then also a little oddly here. For the companies itself, devices for those patients who live longer. Roughly speaking, you can pretty quickly get the headline down to 4% per year. That’s assuming that the 42% – and that would be on the whole company if all 42% of adult obese Americans were on the drugs, were on the GLPs, and that’s 108 million people. So we keep coming back to its really unlikely that that many people are going to be on these drugs. But never say never, you don’t know, none of us on this call know in 10 years if this is going to be another statin or what it’s going to be. I think Abbott has come out on a couple of calls, saying, they think it’s about 12 million Americans will be on these GLPs, and this sort of aligns with that. We’ve all heard this $80 billion in revenue for the analyst estimate for the GLPs out there, and I don’t know, X years, no one’s putting a number on it, and so that would be 12 million being on it. Just for some comparisons, we can discuss this. Lipitor launched in 1997, so maybe the GLPs are another statin, right? Who knows? 40 million Americans are on statins, and I would say maybe the most important topic that you could think about is that even though the statins have been out there, and lots of us 59-year-old men are on statins, the need for CAD and PAD devices. This has only increased over this quarter of a century. So I think maybe this could be like that, but again, I don’t know. The Jefferies analysts who are covering us have written some really nice pieces on this. They might be on this call. They’ve published three – and I’ll close up here, I know this is a bit of a long ramble, Jim, and you probably didn’t ask for all this, but I’ll close up quickly here. They published three lengthy GLP reports in the month of October, and they go all around and they make good proofs everywhere. They come back to this mantra that they repeat over and over. GLPs are indeed – so I’m definitely stealing this from their report, GLPs are indeed a big drop in the bucket, but the bucket’s much bigger and the bucket wins. I think what they’re trying to say is, cardiovascular disease is the number one cause of death in the world. It’s a very big bucket. It’s unlikely that it goes away because of this. In all of this, we didn’t talk about the fact that 40% of LeMaitre is outside the U.S., and I think we all know that maybe this comes to the U.S. and Germany, but I don’t think it’s off in Japan and Thailand for a very, very long time. So I hope that’s a good swing at it, Jim. I’m happy to go in any direction you want with it on that, but that’s sort of what we got to.

Okay. No, that was exactly what I was asking for, but thank you. You said you ended the quarter with 136 sales reps. Do you think you’re at the right number now, or do you think you’ll continue to add in the fourth quarter?

Right. So we feel like we’re going to end the year between 135 and 140, so maybe pick our way down the field and grab one or two more, but we’re good for now. I do think that the growth of the sales force is a continuing objective, and I’m not going to give what we're going to do next year, but I definitely feel like it’s a growth vehicle for us. We’re really, I don’t know, feeling our oats is the wrong word, but we’re feeling really good about the growth of these offices and the growth of these reps around the world everywhere. I mean, we’re growing everywhere with reps.

And then, the last one for me, you indicated the theme for 2022 was to build up the staff, get capacity going for 2023 was to get operating margins improved. Do you want to tell us what you think the theme for 2024 will be?

Right. You want an advanced copy of our planks. We are deep in discussion at lots of bureaucratic long meetings trying to figure out. We publish this thing called the planks; we have nine objectives every year, and it’s on our walls. If you visited our facility, you’d see they’re all over our walls. We’ll have that posted. I think the last meeting is actually, is it this Friday or next Friday? I think it’s next Friday is the last meeting, so we’ll have that all sorted out by next Friday, but it’s a little early to share.

All right. All right. All right. I’ll give it a shot. Thank you.

Thanks, Jim.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Suraj Kalia with Oppenheimer. Your line is open. Please go ahead.

Good afternoon, everyone. Can you hear me all right?

Yes.

Yeah, perfect. So one of the key things, and forgive me I joined a little late, what was the contribution of price in the quarter?

11%, and 5% units, Suraj.

Got it. Fair enough. And George, following up in commentary on GLP-1s, on a relative basis, just given the categories and how you’ll compete in the different product segments, am I wrong in thinking that you should be, or LeMaitre should be relatively more insulated than other cardiovascular companies? I understand you’re pushed back on the 4% and so on and so forth, but just on a relative basis either way, shouldn’t we also look at it that LeMaitre is relatively insulated, and the impact, if at all, should be de minimis?

I mean, the thing about LeMaitre that you have to keep knowing is that we’re really diversified by product categories, by disease state, and by geography. And again, 40% of our revenue is outside the U.S. Yes, 61% USA. So, it’s a very – even though we seem like a small company because I think our guidance here is $193.6 million in revenues, we seem like a small company, but I think we act and feel like a very diversified larger mid-cap because we’re everywhere with a lot of different devices. So, I think you’re right, but again, I’m not sure anyone knows. This is all we’re going to work down the field here and figure this out. The thing about these studies is not much information has come out yet. We really don’t know much.

Yeah, fair point. And the key study will be released, I believe it’s next Friday, so I’m sure there’ll be a lot of discussion. George, in terms of just following up a final question in terms of the 40% outside the U.S., again, maybe I’m just stretching it here, forgive me if I am. How do you all think through the various buffers for risk mitigation outside the U.S., just given everything going on? Geopolitical effects seem to be amping up, and given your exposure, just kind of talk to us as to the buffers from a risk management perspective. Thank you for taking my question.

Right. Okay. Yeah, it’s a great question. And maybe it goes back to how do we choose to get into the markets that we choose to enter internationally, I think it’s your question. And I would say we’ve been very cautious, maybe with the exception of Thailand, which is not exactly what I would call a western democracy, but we’ve been very cautious in trying to follow what I would call, to be pithy about it, the British rule of law. We go to places like Canada, the UK, Japan, Singapore, places where you wouldn’t be – you’d be nervous, but if you got put up on some crime in some of these countries, you’d get a jury, and you’d get a trial by jury. I think most of the places we’ve gone have been those types of places. I think the 40% that we derive overseas is in fairly safe places like Spain, France, Germany, Italy, the UK, Japan, and Canada. I just reeled off in the U.S. Those are the 7 biggest countries of our revenue. We don’t go to places like Russia. We stayed away from Saudi Arabia. We stayed away from South Africa. So we’ve been – it is very thoughtful. I would say the one slightly odd duck here would be the Thailand thing, which is new, but we had a very big distributor there, and we felt like it would be worth taking the risk in what, again, I would not categorize that as a voting democracy right now. But that’s the only one.

Got it. Thank you.

You’re welcome.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Michael Sarcone with Jefferies. Your line is open. Please go ahead.

Great. Good afternoon, and thank you for the shout-out before.

You’re more than welcome. Thanks for the nice research. It’s very thoughtful.

Great to hear. Just a first question, you had the 11% ASP contribution this quarter. I was wondering if you could comment on what’s baked into the 16% organic growth guide for Q4 from a price standpoint. And then, looking forward, how do you think about the sustainability of that ASP contribution going forward into 2024?

Okay. So first answer is not going to be very helpful to you, which is we’re trying not to – we’re guiding what, 16% organic for the quarter? We’re trying not to break that up by units or price. You’re looking backwards, though; you could make some logical inferences, which is, I feel like I don’t know the exact numbers right now, but the relationship between price and units has been a bit stable this year for these three?

13% ASP and Q1, 9% in Q2, and now 11% in Q3.

Going forward, which is part of your question, you’re trying to break into 2024, which we always try to not go into, but we’ll play along a little bit here. Going forward, I think that the LeMaitre story has been about trying to get into niche markets where you have big market share, and I name on real off the valvulotomes, the shunt, XenoSure, we’re a number one player there. Be end markets where you have pricing power, and be end markets where you think worldwide pricing is set in Burlington, Massachusetts. That’s not gone away. You haven’t seen us change our segments here with acquisitions here. So there’s a lot of segments including Artegraft here, where I do feel like you’re setting prices in Burlington and Frankfurt, and we don’t have to go to Arizona and duke it out with them about what the PTFE price is. That’s their issue. I do think this is a bit of a LeMaitre as a price play, and we keep having pricing power. The good thing here is if you want more pricing power, Brussels is about to give it to you in spades. They keep making these regulatory barriers higher and higher with the MDRs. The competitors are falling off like fleas in the smaller markets. They’re just going away. Therefore, it gives us more pricing power. The shunt pricing we’ve had in the last 3 years has been largely because Becton Dickinson left the market. They left the market because Brussels has put up regulatory barriers that are too high for people to climb over. I think the story continues unchanged. I won’t project what 2024 will look like, but I don’t think the story is changing that much.

Mike, this is J.J. Another way to think about Q4 and one of the many ways we think about it is sequentially what’s going on. Those price hikes that I talked about for Q1, Q2, and Q3 are kind of the same and at around 10%. So you’re kind of thinking probably you’re going to do about the same in Q4. And then what else is different? The things that stuck out from Q3 to Q4 this time around were, one is FX. The FX has moved a lot. Sequentially from Q3 to Q4, it’s like a $600,000 headwind. That’s one topic you have to take into consideration. The number of days in a quarter matters. We take those into consideration. Seasonality matters a lot for us as well. Q3 is generally the slower quarter, and Q4 is sort of behind Q2. There’s an uptick there. What does that mean? What’s it been historically? What will it be this year? Then we look into specific stories like we’ve had a RestoreFlow backorder topic in Q3 that we’re working our way out of, hopefully in Q4. And as we get into Q1, what does that mean? Maybe that adds a few hundred thousand dollars. There’s a Thailand story that we went direct there in Q3. The Thailand distributor stuffed the channel, essentially. So we didn’t get the sales we thought we were getting Q3, but we’ll get them in Q4, and maybe that’s a couple of hundred thousand dollars or so. So, sequentially, I think the ASPs, you can think of as consistent, but other topics coming and going to get to the $49 million we got it.

Got it. That’s really helpful. Thank you. And just a follow-up on that. J.J., I think you and I have spoken about in the past. Historically, the price algorithm has really kind of been that mid-single-digit level. But, I guess given the regulatory considerations that you’re mentioning, is it fair to think that maybe the new paradigm is above what we’ve seen historically?

I think we’ll take it year-by-year. But, I think the cycle you’re in right now, at least for this year, and then maybe you can talk a little bit about next year, but not too much. This year, it’s all about mostly valvulotomes and shunts. One of our valvulotomes was priced below one of our other valvulotomes. We brought that price up to match it. Being the premier provider of these devices, the customer said fine. We got really nice price hikes in valvulotomes. In shunts, the topic, George, was talking about with other competitors going off the market, that certainly helps our share and our leverage in those spaces. We’ve gotten nice price hikes there, particularly in Europe. The third thing we did was we put in pricing floors in some of these product lines. You may not discount beneath whatever that pricing floor is, if you’re a sales rep, whereas in the past you could have. To the extent that we use pricing floors in the future, you might get outsized ASP growth versus your 5% historical. To the extent there are other product lines in the bag that are mismatched in terms of pricing that can be fixed, you might get outsized pricing in the future. We’ll see where that goes, but right now, we’re certainly in a nice spot in terms of pricing.

Very helpful. Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Daniel Stauder with JMP Securities. Your line is open. Please go ahead.

Hi, Daniel. You’re up. If you want to ask us a question, it’s George. Operator, they might have bad phones out in San Francisco. Why don’t we move along?

All right. Just one moment, please. And our next question is going to come from the line of Scott Henry with ROTH Capital. Your line is open. Please go ahead.

Thank you. Good afternoon. Just a couple very quick questions. First, if you don’t mind, could you give me the mix between biologics and non-biologics?

Biologics were 51% of sales in the quarter.

Okay. Thank you. And then looking at the numbers, sales and marketing was kind of down sequentially with employees up. Any thoughts on why, and even on similar revenues to Q1, it was down significantly from Q1. How should I think about sales and marketing in Q3 and how that should be indicative going forward? Thank you.

Yeah, so one of the reasons selling and marketing has been elevated in the first part of the year is because sales results were so strong versus quotas. As we get through the year a little bit, quotas start to ramp up a bit. So, even with the 16% consistent organic growth in each of the quarters, the answer versus quota changed a little bit. Q3 is also seasonally a time where selling and marketing goes down a little bit. There’s a little bit of travel and conferences, and all that kind of stuff, so down there as well. There’s a couple of good reasons for that. In Q1, the weird answer is we had a sales meeting. That’s sort of a $600,000 or $700,000 event globally; there’s one for each of the main geographies. You can see an absolute dollar sort of coming down from $10.9 million to the $10.2 from Q1 to Q2. That’s how that cadence works throughout the year.

Okay. Great. Thanks for the color. And final question, you mentioned how you were losing some competitors in some international areas and it benefited some of the products. Are there any new product launches internationally into any specific countries that we should be factoring into our model going forward? Any levers that would change the trajectory of any of the lines in the near-term? Thank you.

Right. Scott, it’s George, I’ll take this great question. I’ll take that. We read out in the script these regulatory approvals, but they’re kind of longer in the – they take a while to get through there. RFA in Europe at some point will add something. We don’t know when we’ll get the approval outside of the UK. We don’t want to get on the hook for changing anyone’s model here. Artegraft is a biggie in Europe, maybe 2 years from now, 3 years from now, but I wouldn’t until – we haven’t filed for the regulatory approval. When we get that in, maybe we’ll have more details on timing and things like that. And then, of course, Artegraft in Canada and Australia. But in short answer, I’d say no; there’s nothing that I’d change my model for here. Things are going along as we’re getting tons of little regulatory approvals over in Asia-Pac that we don’t talk about on these calls because they’re kind of smallish, but the machine keeps going.

Okay. Great. Thank you for taking the questions.

Thanks a lot, Scott.

Thank you. And one moment as we move on to our next question. And our next question is a follow-up question from the line of Michael Petusky with Barrington Research. Your line is open. Please go ahead.

Thanks. Yeah, a few quick ones. George, I didn’t catch this if you said this earlier, forgive me, but the CE mark filing for Artegraft, is that targeted by year-end still, or I think at one point it was?

Yeah, it has been for a long time. It’s on one of our quote planks for this year is to put it in by December 31, so definitely that will go in by December 31, and it’s been on our radar screen for 2 years or so. Yes.

Okay. Great. And then, I want to just make sure I understand what you’re doing in Paris. That’s the first time you’ve had direct sales folks in France, is that correct?

I’m glad you’re asking; so we can sort of re-distinguish it for everyone. No, we’ve had sales reps in France since I think 2007, but this is the first time we’re going to have an actual customer service office with French customer service reps, and all that to give the hospitals a little more hand treatment. We have 8 reps in France, and I would say that’s on the high end of what we usually have; maybe we’ve had 6 or 7, but we always have them.

Okay. Yeah, because when you said that, it was sort of confusing to me that that was the case. Okay. Got it. And then just last one for J.J.

Yeah. Depreciation and amortization, $2.395 million, SBC $1.313 million, CapEx $1.053 million.

Okay. Yeah, thank you. And then just J.J., on gross margin, one quarter, I know, does not make necessarily a trend, but I think you and probably investors are really hoping that it is. I mean, do you feel like, it looks like gross margin may end up being flat for this year. I mean, do you feel like you guys have sort of hit bottom on this and are sort of on the right side of momentum here, I guess, as we look forward?

Yeah. No, it’s a great question. I mean, of course, I want that to be the answer, but I’ll give you some more color behind that. I would say the manufacturing efficiencies from the folks getting more efficient in the seats making devices; that’s been super helpful, and it’s started to come through the P&L. Obviously, price increases help a lot. That’s sort of a 3% benefit year-over-year with these nice price hikes coming through. I would say those two things are sort of fighting against, I would say one quality cost historically. Those increased a lot over the last 4 years, but I would say we’ve really started focusing on those. Maybe we can make some headway on that topic as we move forward. The other piece would be the transition of manufacturing for Omniflow and for CardioCel. Those start out pretty inefficient as we’ve discussed before, and hopefully, we think we can make some good progress on those as we move forward through the quarters. We might get some good answers there as well. We’ll see where that all winds up for next year when we give you guidance.

Got it. Sounds great. Thanks, and really congratulations. This was another excellent quarter. Thanks.

Thanks a lot, Mike.

Thanks, Mike.

Thank you. Ladies and gentlemen, this does conclude today’s conference. We would like to thank you for participating, and you may now disconnect. Everyone, have a great day.