Earnings Call Transcript - LMAT Q1 2021

Operator, Operator

Welcome to the LeMaitre Vascular Q1 2021 Financial Results Conference Call. At this time, I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

J.J. Pellegrino, CFO

Thank you, Joanna. Good afternoon, and thank you for joining us on our Q1 2021 conference call. With me on today’s call are 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. However 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, April 29, 2021, 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 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 of our website, www.lemaitre.com. I’ll now turn the call over to George LeMaitre.

George LeMaitre, CEO

Thanks, J.J. On today’s call, I’ll cover four topics: number one, COVID’s impact on our employees and company; number two, rebuilding our sales force; number three, Artegraft’s results and other biologic updates; and finally, number four, our financial results. New COVID infections at LeMaitre have declined recently. To date, 36 of our employees have been infected, with 35 having recovered and one still recovering. We expect that the vaccination of our employees will prompt the return of more of our administrative personnel to the office. Massachusetts has one of the lowest vaccine hesitancy rates in the country. Perhaps this will mean a quicker return to normal for LeMaitre. Away from headquarters, the vaccines are also helping our sales reps gain greater hospital access. We estimate that 70% of our American sales force and 100% of our British sales force have received at least one vaccine shot. And now the European and Canadian vaccine efforts seem to be turning the corner. More vaccines for our sales reps likely mean more sales calls and more sales. As things open up, we’re simultaneously rebuilding our sales force. At March 31, we had 86 sales reps, and we currently have 14 open rep hiring requisitions. Our field personnel report to us that doctors and nurses are showing more willingness to take sales calls. Investment in our sales force also means building a larger physical presence and stocking inventory in more international locations. So, we’re expanding our warehouse footprint in three geographies: Hereford, England, Milan and Tokyo. This should create tighter customer connections and quicker order fulfillment. Soon, we’ll be shipping inventory from warehouses in eight countries: the U.S., Canada, Germany, Italy, the UK, Japan, Australia and China. As for our recent acquisition, we estimate that Artegraft will grow to $24 million in sales this year, due largely to the January price hike. This $24 million figure implies 29% growth versus hospital-level sales of $18.6 million in the 12 months prior to the acquisition. Artegraft has also begun to add to the bottom line, contributing approximately $3 million of operating income in Q1 and $0.09 per share. In January, we also began paying Artegraft commissions to our broader U.S. sales force, which may increase unit sales going forward. There were three other biologic projects to note. First, XenoSure was approved in Japan in Q3 2020 and sales are ramping quickly, perhaps adding $1 million in 2021. Number two, we launched RestoreFlow cardiac allografts in 2020; we are also adding $500,000 of 2021 sales. And finally, number three, our Chinese XenoSure cardiac trial succeeded in meeting its endpoints, and we will be submitting our approval application to the Chinese FDA this June. We expect approval in two or three years. As for our financial results, we posted sales of $35.9 million, up 17% year-over-year. Sales were up 29% in the Americas and 25% in AsiaPac, and they were down 5% in Europe. Strong sales in Q1 and restrained operating expenses contributed to robust bottom line growth. We generated $7.9 million of operating income in Q1, EBITDA of $10.5 million and EPS of $0.28. All of these metrics were 83% better than their year-ago comparisons. With that, I’ll turn the call over to J.J.

J.J. Pellegrino, CFO

Thanks, George. Geographically, sales were driven by the U.S., up 29%, largely due to Artegraft sales; Canada, up 25%, largely due to allograft sales; and the PAC Rim, up 25% due to strong export in Japan sales. By product, Artegraft, Valvulotome and Embolectomy catheters drove Q1 growth. Our Q1 gross margin was 66.3%, a decrease of 70 basis points year-over-year. The decrease was driven by a $600,000 TRIVEX inventory write down, manufacturing inefficiencies, lower allograft gross margins, and higher costs in the recently transferred Syntel manufacturing lines. Somewhat like our sales force, our direct labor force shrank in 2020 due to COVID, and we’ve now begun rehiring. Operating expenses in Q1 2021 were $15.9 million, a 2% year-over-year decrease. The decrease was driven by continued cost control, including 31 fewer employees, more than half of which were sales force related. As George mentioned, we’re now increasing the size of our sales force. We’re also hiring in other areas of the company and expect operating expenses to increase in the coming quarters. Operating income in Q1 was $7.9 million, an increase of 83%, or $3.6 million, versus the prior period. The increase was driven by a $3.3 million increase in gross profit and lower operating expenses. The Q1 2021 operating margin was 22%. We estimate that Artegraft contributed about $3 million to Q1 operating income as the newly acquired products benefited from strong sales and an improved gross margin. We paid our debt down by $7 million in Q1, ending the quarter with $32 million in total debt. Since the June 2020 acquisition, we’ve paid down $33 million. We paid down the $25 million revolver first, and we still have access to this facility. We expect to continue to aggressively pay off our bank debt. We ended Q1 2021 with $23.7 million in cash, a decrease of $3.2 million from December 31. The decrease was driven largely by the $7 million debt repayment. Excluding this debt repayment, cash increased by $3.8 million in the quarter. In relation to our CE marks, due to the abrupt exit by our prior notified body from CE marking in 2019, we needed six CE marks. In 2020, we engaged two new notified bodies to accelerate the CE marking process. And in February of this year, one of these notified bodies, SGS issued a CE mark for LifeSpan. We expect SGS will issue three additional CE marks next month for our FlexCel carotid shunts, Pruitt F3 carotid shunts and AnastoClips. Together, these products accounted for 7% of EMEA sales in Q1 2021. We continue to work with TUV, one of our other notified bodies on the issuance of two CE marks for XenoSure and AlboGraft, which we expect by next month, though no assurance can be given. Together, XenoSure and AlboGraft accounted for 23% of EMEA sales in Q1 2021. If any of the CE marks referred to above are not reissued in May, then we could lose our ability to sell some of our devices in Europe. For more information on this topic, please see our risk factors in our 10-K filed in March 2021. Turning to guidance. At the midpoint, our Q2 2021 sales guidance of $37 million to $40 million represents an increase of 55% versus Q2 2020. And our Q2 operating income guidance of $8 million to $10 million represents an increase of 85%. At the midpoint, our Q2 2021 EPS guidance of $0.28 to $0.36 per share represents an increase of 86%. With that, I’ll turn it over to Joanna for questions.

Operator, Operator

Thank you. Your first question comes from the line of Rick Wise from Stifel. Your line is open.

Rick Wise, Analyst

Good afternoon everybody. Nice to see the solid first quarter. Just to start it off, maybe from two perspectives. The first quarter clearly came in solidly in your guidance range. Where was the headwind that prevented you from perhaps reaching the upper end of your guidance? And just with that thought in mind, as we think about the second quarter and the lower end and the upper end, help us understand maybe a little better your thoughts, less about the lower end, but what gets you to the upper end? Is it more about reopening? Is it more about hiring the sales force? I just wanted to understand the dynamics going into your thinking – your experience in the first quarter and your thinking about the second.

George LeMaitre, CEO

Rick, thanks for your question. It’s George here. I know you’re posing your question. You beat your guidance by $600,000, but still didn’t feel as great as it could have. I think that’s the essence of the question. And as we were preparing for today’s call, we started trying to funnel stuff down. I would say if we had issues in Q1, although, again, we beat our guidance, we felt great about that. If we had issues, I would funnel it down into three easy-to-remember Cs. The CE Mark continues – as you can hear from J.J.’s script, the CE Mark continues to dog us as we’re very close to getting them, but we haven’t quite gotten them. COVID, I think, is still a real issue. We’re all watching what other companies are doing right now; some companies are breaking out of it, and some companies are still mired in. I would say we felt it more strongly in Europe in Q1 than we did in the United States, but it was still a very present issue in January and February, let’s say. And then the final C, we would call – we talked about this a lot on the last call, channel loading. In Northern Europe, in Q4, we had a lot of reps trying to win a lot of contests. We did really well in Q4 and crushed guidance. I think that sapped away a little bit from our ability to crush guidance in Q1. So I’d like to say, maybe those are the three Cs that you’re looking for: the CE Mark, COVID, and channel loading. There’s nothing to look at in Q2 2020; that’s a non-quarter. You’ve seen that with all your companies. Everyone’s going to report sales were up 60%, 80%, or whatever. I think we’re projecting sales are going to be up 55%. But you really want to know, what happens between Q1 and Q2, maybe that’s the new organic growth rate for us. I don’t know. So going from Q1 to Q2, we’re up 7%. I think it’s – you go back to those three Cs, and we see all of them dissipating. The CE Mark, again, we feel it’s very close. This thing is supposed to end May 25, and we think we’re going to get five more CE marks between now and then, which would get us back on track, basically. We feel like the vaccines, particularly in the U.S. and the UK, where 64% of our sales are located in those two geographies; 2/3 of your sales are in very high vaccine regions, which means COVID going away for us for sales. Finally, channel loading, that’s going to be over. It usually is – they sell enough stuff to win the contest. They take Q1 off, and then Q2, they’re back at it. Probably the three Cs explain what happened, if you will, and why we didn’t crush guidance by more than $600,000. Maybe they also transition in explaining Q2 for you.

Rick Wise, Analyst

Two other questions. Artegraft, clearly, $3 million in the first quarter. I just wonder if you could help us think through or contemplate how to understand the sort of go-forward run rate for Artegraft. Did you have the full price increase impact in the first quarter? Or did we not really have it in all accounts throughout the quarter? So therefore, selling no more units in the second quarter – I’m making it up – it’s $4 million. How do we think about the growth in the go-forward run rate on Artegraft?

George LeMaitre, CEO

Sure. Rick, just so it is for everyone, I think in the call, we mentioned there’s a $24 million number that we’re putting out there for the year, and it was up versus $18.6 million. This is the one thing we’re giving a long guide on. We couldn’t be clearer about what we think is going to happen. $24 million of sales is up about 29%. How do we think about it? We try to let you guys know that so far, it’s just a price hike, and that’s what it is. It was a hefty price hike; it was something like 25%. We seem to have gotten it. January was oddly light, and some of it may have been people adjusting to all the price hikes and wondering what to do about them. We know about January being a non-month really for us. After that, it gets into the $24 million for the whole year. We do think there’s upside from here. In January, we officially put Artegraft into our broader U.S. sales force bag. Before that happened, six reps were being commissioned, and now we think as the year goes by, that adds to units.

Rick Wise, Analyst

Lastly, I can’t resist asking, you've touched on Artegraft specifically. Just the recent trends. January was a challenging month for every company that has reported. How were February and March seen? For most, they have seen a sharp acceleration. Are those positive trends continuing into April? Is that LeMaitre’s experience? How is the second quarter starting to you? Any color you can give us?

George LeMaitre, CEO

Okay. To answer two-thirds of your question, I’m going to stop guiding into Q2 because we’ve already said what we want to say about Q2. The month of January was down 14% organically. February was down 9% organically. In March, we saw a 7% organic increase. That’s how we came out of Q1. It makes some sense, given the channel load in December. For us, it made some sense that January was bad, but I agree, I did hear from other people that January was just bad anyway.

Rick Wise, Analyst

Got you. Thank you so much.

George LeMaitre, CEO

Thanks, Rick.

Operator, Operator

Thank you. Your next question comes from the line of Matt Mishan from KeyBanc.

Brett Fishbin, Analyst

Hey George, hey J.J., this is Brett, on again today for Matt. I think Rick hit a lot of the revenue questions. So, I might move down the income statement a little bit and ask about margins. The Q2 guidance had a modest sequential gross margin lift, but still was down a little bit year-over-year. Can you walk through some of the moving pieces there? And any other directional commentary on how it could progress back to the historical range from there?

J.J. Pellegrino, CFO

Yes, sure. The sequential answer up sort of marginally up about 40 basis points. I think ASP increases still have some room to grow. You rerack your prices on January 1, but you don’t get all that in the first quarter. Depending on the purchasing cycles of the customers, there’s room to run there for ASP increases, which will help margins. You know you have strong Artegraft growth going on, and both of those are carrying nice, strong gross margins. However, we’ve got some old manufacturing inefficiencies coming off the balance sheet that are hurting us. Seasonally, oddly, our gross margin tends to tick down a little bit in Q2. Year-over-year, it’s a more dramatic answer, as you mentioned, it’s down 1.8%. We had some inventory write-offs in one of our product lines. There are manufacturing transfers that are causing some start-up costs and inefficiencies. We did layoffs in manufacturing as well, which affected efficiency. Hiring back in that direct labor force, which we’re doing, should provide benefits moving forward.

Dave Roberts, President

Hey Brett, it’s Dave here. The pipeline looks good. We have been pursuing acquisitions for a long time, and we have a lot of targets. We’re pursuing those with fewer congresses and less travel, which cuts into bandwidth a little, but we’re fortunate to have a broad set of targets. The center of the bull’s eye are disposables and implantables used by vascular surgeons, but we’re starting to think more about peripheral endovascular since we have so many customer relationships in that space. We also get some revenue from cardiac surgery, and we’re looking around that area as well.

Brett Fishbin, Analyst

Another question, though; regarding Europe, you sounded confident about resolving the CE issue. How is the macro progressing over the past couple of months and into April? Might it be less of a headwind to overall growth next quarter?

George LeMaitre, CEO

Brett, thanks for your questions. We try to keep these calls limited to ending March 31. I don’t have any particular insight to add for you about the macro environment in Q2, to be quite honest. I see what I see; it’s our sales, and we always like to sort of wait and package it all up as a quarter at the end of the quarter.

Brett Fishbin, Analyst

No, totally set. Thanks very much.

Operator, Operator

Thank you. Your next question comes from the line of Frank Takkinen from Lake Street Capital. Your line is open.

Frank Takkinen, Analyst

Hey, thanks for taking my questions. I wanted to ask specifically about the 14 reps you guys are looking to hire. How long is the expected training time once those come on board? If those come in the second quarter, what quarter do you expect them to start contributing to sales, especially with Artegraft trending forward?

George LeMaitre, CEO

Okay. Frank, it’s George. Of the 14 reps being hired, eight of them are in the U.S. I expect them all to be hired by the end of the quarter. If you want to pick a median hiring date, let’s say June 5. How quickly they come up to speed varies. Some can be up and running within a month, while others may never get up to speed. If you had to pick a number, I’d say roughly six months. For international hires, it takes longer due to notice periods. A median hiring date for those six might be July 1 or later, with the same ramp-up time. However, I wouldn’t distinguish between the two for ramp-up time.

Frank Takkinen, Analyst

Secondly, you’ve been aggressive about paying down debt, roughly cutting in half over the last three quarters. Will this continue at the same pace, assuming you keep generating operating cash flow?

J.J. Pellegrino, CFO

Yes. Looking at how we’ve done this over the last three quarters, we paid down $4.5 million in Q3 and then $21.5 million in Q4, and $7 million in this quarter, which mirrors our operating income number. Historically, we were in the $5 million’s range of op income per quarter. Now, with sales and expenses normalized, we will use cash to pay down debt. I don’t think it feels like it did in Q4, but maybe it feels more like we just did in Q1. We’ll see how that goes going forward.

Operator, Operator

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

Mike Petusky, Analyst

I missed the Artegraft revenue number. What was the revenue number for Q1?

J.J. Pellegrino, CFO

$5.83 million.

Mike Petusky, Analyst

What were the other drivers impacting gross margin?

J.J. Pellegrino, CFO

FX helped us about 1%. ASP increases were important, more than 1.5%. A strong mix from Valvulotome helped, while lower gross margin items were lighter in the quarter. Importantly, we had that write-off of our TRIVEX inventory impacting us, which totaled around $580,000, and that product line hasn’t performed well.

Mike Petusky, Analyst

What’s the cost related to getting the CE Mark issue resolved? Do you have an estimate?

George LeMaitre, CEO

It’s been extraordinary to track the costs associated with this. Each time we need to go back, we fill out another form and conduct another clinical trial. It’s been exceptionally tough. The expenses continue to be integrated into R&D base, and we're living at 8% of sales being R&D based, primarily due to this issue; however, quantifying it is challenging. I can tell you it’s been significant.

Dave Roberts, President

There’s also the opportunity cost of products that have CE marks that are in derogation. We’ve seen some sales decline due to that as well.

George LeMaitre, CEO

Once we get these CE marks, we could see some relief on the associated costs, although there’s the potential for more CE marks which may add costs in other areas.

Mike Petusky, Analyst

Regarding XenoSure in China, what happens between June of this year and the two to three years from now? Can anything be done to build the product's reputation in the meantime, or does it just sit?

George LeMaitre, CEO

You are not supposed to market medical devices without approval, but you could discuss the concept. We’ve been focused on getting the trial fully subscribed and finishing it and are happy with the successful endpoints. In June, we will submit our application to the CFDA. After that, we have to wait two or three years. For now, we are focusing on getting the CFDA application complete.

Mike Petusky, Analyst

Was XenoSure flat or down for the quarter? What was the performance in Q1?

George LeMaitre, CEO

It was down 4%, tracking in line with the company. We lost some sales in XenoSure Europe, but we have something really good going in Japan right now, which is contributing positively.

Dave Roberts, President

Thanks a lot Mike.

Operator, Operator

Thank you speakers. There are no more questions as of this moment. Do you have any closing remarks?

George LeMaitre, CEO

No. Thank you. I think we’re all set. Thanks for running this call.

Operator, Operator

You’re welcome. And ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect. Have a great day.