Welcome to the LeMaitre Vascular Q4 2023 Financial Results Conference Call. 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 Q4 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, February 27th, 2024, 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. Q4 was an excellent quarter with 19% sales growth, a 68.1% gross margin, and 46% operating income growth. I'll focus my remarks on the top line, sales force activities, and some regulatory updates. Geographically, EMEA was up 21% in Q4, the Americas 20%, and APAC 11%. By product, bovine patches were up 18%, allograft 52%, valvulotomes 12%, and carotid shunts 16%. Distribution of porcine patch also added $1.5 million of sales in the quarter. The return to hospital by staff and patients, ASP increases, ample product supply, and the growth of our sales force drove Q4 sales growth. We ended 2023 with 136 reps worldwide. By December 2024, we expect to employ approximately 150 reps. To accommodate rep growth in North America, we recently promoted three Regional Sales Managers to become Area Sales Managers. This additional management bandwidth should enable us to hire, train, and manage more RSMs and reps. The revenues from the 2020 Artegraft acquisition, coupled with recent sales growth, have made our North American territories too large. In 2023, our average North American territory had $2 million in sales. Over the years, we found smaller territories enable tighter relationships with surgeons. So, we've begun dividing some of the larger territories. This should reduce windshield time too. In Europe, we also remain in growth mode. We plan to open a Paris office in Q2, which should improve our connections with French surgeons and hospitals as well as our eight French sales reps. France is our sixth largest country by sales. Turning to Asia. I visited four of the six APAC offices in early February. Things look great over there. Our Tokyo branch is celebrating 20 years and we've just opened offices in Seoul and Bangkok. In our first direct year in Korea, 2023 sales reached $1.7 million and operating profits were $250,000. Both figures exceeded expectations. In Thailand, our first full year of direct sales should be about $1.6 million in 2024. Our Chinese team is also performing well and grew 40% last year. The Artegraft CE file was submitted in December 2023, and we also plan to file for Artegraft approval in Canada, Australia, and several other APAC countries this year. We also plan to make XenoSure filings for our peripheral and cardiac products by 2025 in China. And we're also making the MDR transition in Europe. As you know, Brussels has extended the MDR deadline to 2027. 22 of our product categories need this new MDR CE mark. So this is a considerable undertaking. We currently own three of these new MDR CE marks. Also in Europe, our allograft filings have been made in Ireland and Germany; an approval in either of those countries will be our first approval of allograft in the European Union. To conclude, 19% sales growth and a gross margin recovery produced 46% operating income growth in Q4. Our growing profitability and cash on hand provide safety and strategic optionality. With that, I'll turn it over to J.J.

Thanks, George. 2023 was an excellent year. We posted $193 million in sales, an increase of 20% on a reported basis and 17% organically, while our operating income increased 37% on a reported basis. As 2022 was our post-COVID rehiring year with 141 ads, and 2023 was the hiring constraint year with only 23 additions. This headcount control, along with our strong sales results and an improved gross margin led to a 19% operating margin in 2023 versus 17% in 2022. Separately, our cash balance has improved by $22 million in 2023 to $105 million. Turning to the quarter. In Q4 2023, we posted a gross margin of 68.1%, up 450 basis points year-over-year. This increase was driven by higher ASPs, productivity improvements, and a weaker dollar. The benefits of a larger and more efficient manufacturing team have come onto the P&L. Our allograft manufacturing team had a strong Q4 and quality costs remain in check. In retrospect, our manufacturing hiring surge was well-timed with the global return to hospital. Operating expenses in Q4 2023 were $23.1 million, an increase of 21% versus Q4 2022. The increase was driven largely by higher sales commissions, more sales professionals, and $700,000 of one-time reversals in Q4 2022. Q4 2023 operating income increased 46% year-over-year to $10.2 million, driven by higher sales and an improved gross margin. The operating margin in Q4 was 21%, up from 17% in the prior year period. Separately, we recently went live with a new ERP system in the United States. This system should improve real-time reporting, streamline financial processes, and provide more sophisticated analytics. Implementation at our overseas entities will take place in 2025 and 2026. We estimate that we will spend approximately $7 million to $8 million on this project, and the annual P&L impact will be approximately $1 million per year. With respect to guidance, we are forecasting improved operating leverage in 2024, driven by restrained operating expense growth and an improved gross margin. Our guidance includes an operating margin of 21% in 2024 versus 19% in 2023 and 17% reported in 2022. For more details, please see our business outlook issued in today's press release, but a few Q1 highlights include reported sales growth of 10%, gross margin of 68.5%, operating income growth of 33%, and EPS growth of 42%. And for the full year 2024 guidance includes reported sales growth of 10%, gross margin of 68%, operating income growth of 22%, and EPS growth of 23%. With that, I'll turn it back over to the operator for questions.

Thank you. Your first question comes from Suraj Kalia with Oppenheimer. You may proceed with your question.

Hi George, J.J., can you hear me all right?

Yes.

Gentlemen, apologies for the background noise. So George, let me start out. In your prepared remarks, you talked about territories or maybe it was J.J.'s comments. But when you split the territory, let's say, from $2 million to, let's say, $1 million, can you walk us through the thought process in terms of sales rep commission retention? How does the process go about?

Sure. This is completely normal for medical device activity. This is how sales forces grow. When a sales territory becomes too large, it needs to be divided. For instance, if a representative is managing $2 million in medical device sales in Ohio, some smaller hospitals may start to feel neglected. Therefore, it makes sense to split the territory, assigning one person to Cleveland and another to Columbus to cover Ohio more effectively. This approach in the EMEA region is perfectly typical. What else would you like to know about what occurs there?

I was just curious about whether you typically face any issues with sales force retention and if that leads to concerns about churn.

Sure. I don't have any specific concerns. I agree that any changes related to the sales team can lead to higher turnover, but that's normal, and necessary to ensure quality service for the surgeons in the hospital. Recently, I came across an article discussing what's being termed the Big Stay, which contrasts with the Great Resignation. LeMaitre has seen a significant drop in turnover this past year, with our rate at about 7.5%, down from around 14% or 15% the previous year. We're consistently performing three to four points better than our peers in Massachusetts. We've noticed a major decrease in turnover, particularly within the sales force. Last year, the company experienced a substantial surge in procedures, leading to a 17% organic growth, compared to our typical 9% growth rate. Consequently, the compensation for our sales representatives was significantly higher in 2023, which kept them motivated to stay on for their paychecks. Unlike in previous years, we haven't seen significant departures around January when commissions were being paid out. Overall, our sales force is doing very well, and the commission checks are substantial.

And, Suraj, part of your question was how do the commissions change when you split the territories? And as you recall, we compensate the reps based on their performance versus a gross profit dollars quota. And so when the territories split, we obviously commensurately split the gross profit dollar quotas or change them based on whatever the new situation is. And then their compensation, their tier that they get paid, doesn't change, but what it's linked to does change. So it's kind of 'fair' when you make the split. There isn't a big topic necessarily around that, that they're obviously going to make half of what they were making before.

Fair enough. Gentlemen, I'll quickly ask my two follow-ups to avoid the background noise. So, George, I'd love to get your updated thoughts on your M&A strategy looking forward. And the second question I have is I'd love to get your perspective. Valvulotomes grew 12% year-over-year. Obviously, that was the BEST-CLI study, and that has really seen pull-through for you guys in terms of growth. Are you all seeing any counterbalancing going on with the Basel II study, which gave somewhat opposite results? Just curious if any, onto your thoughts on that front. Thank you for taking my questions again.

Hi, Suraj. Great to hear from you. And, yeah, with respect to the acquisition strategy, I'd say the criteria are consistent from previous calls. Of course, we're focused on open vascular targets with more than $5 million of revenue. There are about 25 of them altogether. Beyond that, we are and have been hunting in adjacent markets, maybe first cardiac surgery and endovascular. If anything, I think we learned from the Artegraft acquisition a few years ago that hunting larger is probably a good thing. It will move the needle more. So we've been looking at a little bit larger targets. And also, we have more cash, of course, to do an acquisition. With $105 million of cash and leaving $20 million on the balance sheet, plus maybe 3x our $46 million LTM EBITDA, we could fund $225 million of purchase price, excluding an equity raise or the target EBITDA levered up. So I think we're just consistently looking out in the same hunting grounds where we have been. And hopefully, someday, we'll be able to report back that we've done the transaction.

And Suraj, you asked about the BEST-CLI question. Yes, in the first half of the year, I feel like we got excited about the BEST-CLI study, as it relates to Valvulotomes. And then, of course, Basel comes out, the European study, Basel II comes out. And it's sort of the antidote to BEST-CLI; BEST-CLI basically says, do leg bypasses, first open surgery. And then Basel II comes and says, 'No, no, you can do stent in angioplasty, you're going to get great results that way too.' So in some ways, you do have surgeons that want to do open surgery saying, 'I listened to BEST-CLI,' and then you have surgeons and Angiologists, who want to use angioplasty in stents who come out and say, 'I heard about Basel II.' So there was a little bit of a retrenchment, I would say. For the exact factor, we grew Valvulotomes 12% in dollars. That's 11% organic, and units were up 5% last year. In fact, in general, across our portfolio, units were up 5%. So our first year with Basel II, I would say Valvulotomes didn't go crazy good, although that 5% was better than the slightly decreased units of 2021 and 2022. So 2021 and 2022 decrease was around 3% to 4% in units and then it bounced up again post-Basel. I guess I'd say make of it what you will. It seems like it was a good thing, but it then got counteracted by Basel II.

Thank you.

Thanks a lot, Suraj. Those are great questions.

And one moment for your next question. Your next question comes from the line of Daniel Stauder with JMP Securities. Your line is now open.

Yes. Great. Can you guys hear me?

Yes, Dan.

Great. So first off, I just wanted to ask on gross margins, very healthy gut and great to see, and you talked about some of the primary drivers there. But as you look out to 2024, could you give us an idea of how much of the contribution is coming from the manufacturing efficiencies versus some of the ASP gains? And then how should we think about cadence for gross margin in 2024? Thanks.

Yes. The two main factors driving our performance are the manufacturing efficiencies I've mentioned over the past few quarters and the healthy average selling prices this year. Both are important, and they roughly contribute equally to our improvements. The impact may vary depending on the time frame you are considering, whether year-over-year or sequentially. Overall, the advancements in manufacturing efficiencies and ASPs are significant contributors. Additionally, controlling our quality costs, which had been increasing too quickly, has also played a crucial role. We have started to monitor and manage these costs better, which should positively affect our margins moving forward. Furthermore, RestoreFlow has recently achieved impressive operational results in processing, and we hope to maintain that momentum throughout the year.

Great. Thanks. And then just one follow-up related to M&A. Cash generation has been very healthy this year in 2022 and 2023. Just with the announcement of the share repurchase, $60 million. How should we think about the pecking order for use of cash? Does that change how you look at M&A this year? Or do you feel that you would be able to achieve both and just kind of weighing your options? Any thoughts there would be great. Thank you.

Yes, Danny, it's Dave Roberts. I believe that increasing the share repurchase authorization is a sound corporate strategy. Our cash balance is growing significantly, so raising it from 25% to 50% seems like a smart move. Ultimately, we're using cash to support the dividend, which we recently increased for Q1 from $0.14 to $0.16, marking our 13th annual increase. This is a stable practice for us. Any extra cash will be allocated towards acquisitions, as we have been actively looking for opportunities. At some point, we will find a suitable target. If a potential acquisition requires more cash, we are prepared for that, while also considering other cash needs such as capital expenditures or distributor buyouts, similar to those we completed in Korea a couple of years ago and in Thailand last year.

Great. Thank you very much.

Thanks, Danny.

Your next question comes from the line of Rick Wise with Stifel. Your line is now open.

Hey. This is John on for Rick. Just to start off, I wanted to get a little bit better understanding of guidance this year, and maybe how price is contributing to the growth outlook in 2024 versus how it contributed to 2023?

Yes. So in 2023, I mean, you've heard us talk about it quarterly. And I think George mentioned that for the full year 2023, it's about 11%, 12% pricing impact. And I would say going forward in 2024, maybe our default answer is sort of around 5% or 6%. Notably, that was kind of the default answer this past year, 2023. We instituted something a little bit new called pricing floors. And I think we've got more traction out of those than we thought we might get. And so maybe we'll do a little bit more of that this year. We'll see where that goes. But I would say if you want a sort of base case answer, it's probably in that mid, high-single-digits range.

Thanks. That's helpful. And just looking ahead, just focusing on the gross margin line. You're guiding to 68% for 2024. That's pretty strong growth. You're talking a lot about manufacturing increases, manufacturing efficiencies, and price increases. Just as I look further ahead, I mean, how should we be thinking about the gross margin structure for the business going forward with higher ASPs, more efficient manufacturing? Could we be thinking about potentially returning to sort of the pre-COVID 70% gross margins you had? Thanks.

Yes, we're not looking too far ahead at the moment. Right now, we're satisfied with achieving 68% as a next step in our growth. We'll see how that progresses. If the price increases continue to be around 10% rather than 5%, that will contribute to additional benefits. Maintaining efficiency among our direct labor force will also help. However, gross margin is influenced by many factors, not just these two. Inventory management is a concern for us during consolidations, transfers, or manufacturing issues, especially when dealing with excess and obsolete stock that can impact us for a quarter or two. Quality-related expenses are another factor, along with transitions in manufacturing product lines like Omniflow and CardioCel. We've also invested in clean rooms over the past year or two, which affects depreciation and may slightly lower our margins. I don't want to oversimplify the gross margin situation, as it is complex. We'll see what the outcomes are after this year. But I do want to leave John with some optimism for the future. There are multiple opportunities in this area, and we're adjusting to maintaining 68%. We have significant short-term goals to pursue.

Appreciate the color, guys. Thanks.

Your next question comes from the line of Michael Petusky with Barrington Research. Your line is now open.

Thank you. Good evening. J.J., you get the 300 basis point improvement. People are asking for more; they're never satisfied.

I know that is the last long, but it really didn't.

You had about an hour after the press release came out, I guess. All right. So I didn't catch this if you guys mentioned it. Did you mention what percentage of the Q4 sales growth was related to price and volume, how that split out for Q4 specifically?

We did not. It was 13% price, 1% volume. And for the year, again, to repeat, it was 12% price and 5% volume.

Okay. Is it possible to provide the Autograft revenue for the quarter and for the year?

Yes, of course. Let's try to find it quickly for you here.

I have, Mike, it's Dave. It's a little under $8 million, $7.9 million, up 10% for the quarter, Q4 in the year.

Going to be around $34 million, something like that.

We can get you that while we're on the call.

I have another question. So obviously, it's been a while and the Artegraft deal has been successful, and I know Dave has been looking diligently. J.J., in terms of your comfort level with leverage; obviously, you guys said you could do a $225 million deal potentially. I mean where do you think you sort of top out in terms of your comfort level, your leverage ratio on an external growth opportunity?

Yeah. So if you're maybe 3 times, 3.5 times EBITDA; maybe somewhere in that range before you talk about the EBITDA of the acquired company. And if EBITDA is sort of in the $45 million, $46 million range these days, maybe it's in that sort of $130 million, $140 million, $150 million, somewhere in there, Mike, I would say.

Okay. Very good. And then just one more quick question. The pricing floor initiative; it does seem like it's really, really helped on an incremental basis. I'm just curious, I suspect maybe you went after some of the easiest low-hanging fruit on that and maybe it's tougher going forward? Or was that not the case in terms of pricing floor and what you can do there?

Okay. Yeah, that's a good question. And at a high-level, what the management team has been trying to do over the last three years is sort of take the pricing lever away from individual reps and bring it back in-house because as the previous question asked, the reps don't last forever here, and sometimes they cut a deal at a low price, then we're left with it for years. So we're just kind of pulling it back. And this all started, Mike, about two years ago in the U.S. with one or two products. And now it's become a full-blown effort. And for the first time ever, this year, there's a full set of pricing floors in Europe. We've had some pricing floors in Europe before, but for the first time ever, it's drilled into what we call the plank card, which is this little goal set that we pass out to every single employee. So we've got a European plank set that has pricing for us. And then also, again, for the first time ever, it's being drilled into the Japanese planks, and so in Japan specifically, not all of Asia, just Japan, which is half of our Asia right now. So I think you still got some room to go here. I think you'll start learning in nine weeks when we come back to you guys with Q1 and say, hey, what happened in Q1 relating to pricing. But it's become a full-blown effort and it started with dribs and drabs two and a half years ago. And now it's real. And it's worldwide.

And Mike, on your...

And then...

Sorry, did you have a follow-up on that?

No, no, go ahead.

Yeah. On Artegraft question we have a category, bovine-graphs I think it's nearly all the autograft category. It was call it, $33 million in the year and it was up 15% on a reported basis.

Can I just confirm, George, you were speaking quickly when discussing some of the OUS development. Artegraft, Canada, and Australia filings in 2024, is that correct?

That is correct. And then also, we've thrown in roughly five more Asia Pac countries we'll file over there as well.

And then offshore XenoSure is still 2025 in China.

Yeah. I mean it just keeps pushing away, but yes, XenoSure cardiac and peripheral in China 2025.

Okay. Great. Well, listen, congratulations and particularly, congratulations to the team and particularly J.J. on that gross margin. I know you've been after that for a while and congrats. Thanks.

It's a thankless job, Mike.

And your next question comes from the line of James Sidoti with Sidoti & Co. Your line is now open.

Hi. Good afternoon and thanks for taking my questions. Can you talk a little bit more about the sales force expansion? You said, I think you're going to add about 14 folks in 2024. Can you break that out internationally and domestically?

Sure, it seems primarily focused on the domestic market. We have several opportunities lined up in the U.S., fewer in Canada, but it can be considered a North American effort. There are also a few in the Asia Pacific region, particularly with our newer subsidiaries. For instance, it wouldn’t make sense to enter Korea without providing three or four sales representatives. This year, most of our focus is in North America, with a slight presence in Asia and hardly any in Europe.

Okay. And you mentioned you opened offices in Korea and Thailand, what were you doing this year with those folks just working into their home? Or what's changed?

In 2023, we completed our first full year of operations in Korea. Previously, we used a distributor who sold our products to Korean hospitals, a process that had been ongoing for four years before I arrived. We eventually acquired her distributorship, established an office, hired a general manager, and brought on three sales representatives for Korea. They have been functioning from our Seoul office for a year, following a similar approach in Thailand.

Okay. All right. And for 2024, you guided for about 9% organic growth. Is it fair to say that a significant portion of that is from pricing?

I would say we try not to guide on pricing, because it's so variable what's happening. But if you look back to the 12% and 5% this past year in 2023, 12% price, 5% units, maybe that relationship holds until we all know differently.

Okay. And then the last one, J.J., can you tell me what you're expecting the tax rate to be for 2024?

For Q1 or a 2024, let's see, I put it, Jim, 24.3% and then for the full year, 24.1%.

Well, can you be a little more specific?

You ask?

Thanks, Jim.

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