Earnings Call: Q2 2021

Jul 29, 2021

Welcome to the LeMaitre Vascular Q2 2021 financial results conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir. Thank you, operator. Good afternoon, and thank you for joining us on our Q2 2021 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, July 29th, 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 the disclosures of 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 as 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. On today's call, I'll cover three topics. 1. COVID's impact on our employees. 2. Record Q2 sales. Finally, 3. Rebuilding our sales force. First, I'd like to review COVID's impact on our team. 38 employees have been infected since the pandemic began, with all now recovered. Thanks to the availability of vaccines, our U.S. and U.K. staff returned to the office on June 21st, and our E.U. and Canadian staff did the same on July 26th. We continue to observe health and safety measures in our facilities. We posted record sales of $40.7 million in Q2, up 64% versus the COVID-affected Q2 2020. Sales grew 83% in the Americas, 36% in EMEA, and 30% in APAC. By product, Artegraft sales were $6.7 million in Q2, and there were several records. Valvulotomes, carotid shunts, carotid patches, and allografts. APAC benefited in Q2 from $250,000 of Japanese XenoSure sales. We expect to submit XenoSure trial results to the Chinese FDA by October. Chinese XenoSure approval is likely in 2023 or 2024. We ended Q2 with 88 sales reps. Despite 27 open requisitions, sales rep hiring has been slow. We intend to return to our pre-COVID high watermark of 112 reps. Meanwhile, we're expanding our warehouses in England, Italy, and Japan in order to improve customer connections and speed up order fulfillment. By October, we'll be shipping from our warehouses to hospitals in eight of our nine largest markets. With that, I'll turn the call over to JJ. Thanks, George. Our Q2 2021 gross margin was 65.8%, a decrease of 2.7% over the prior year period. The decrease was driven by changes in product mix, manufacturing inefficiencies related to our 2020 personnel reductions, and inventory write-downs, largely from our TRIVEX product line. We are currently rehiring manufacturing personnel, which should bring manufacturing efficiencies in the coming quarters. We posted operating income of $11.1 million in Q2 2021, more than one-third of which was contributed by Artegraft. Operating income was also up due to restrained headcount growth. We ended Q2 2021 with 417 full-time employees, including 88 sales reps, compared to pre-COVID 2019 levels of 454 and 112 respectively. In Q2 2021, our operating margin was 27%. Cash flow is also improving. EBITDA of $13.3 million was up 108% year-over-year. We ended Q2 2021 with $23 million of debt and $21.8 million of cash and investments. Since the June 2020 Artegraft acquisition, we have paid down $42 million of debt from internally generated cash. Last week, we retired the remaining $23 million with proceeds from our recent $54 million stock offering. We continue to maintain our $25 million untapped revolving line of credit. Improved profitability and cash flow have increased our access to debt and equity capital markets. Turning to guidance, for the full year 2021, our sales guidance of $154.1 million-$158.1 million represents an increase of 21% at the midpoint versus the full year 2020. Our operating income guidance of $37.7 million-$40.4 million represents an increase of 36%. Our full year 2021 EPS guidance of $1.30-$1.40 per share represents an increase of 30% at the midpoint. With that, I'll turn it back over to the operator for Q&A. Thank you, presenters. At this time, for the participants to ask a question, you may press star one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Now we have our first question from Rick Wise. Your line is open. Good afternoon, everybody. Maybe we could dig into a couple of topics. Obviously, it's great to see the strong quarterly finish. You've given us very specific guidance ranges for the third and fourth quarter. Thank you. It makes it easier. Maybe just as coming out of the second quarter, you could help us think about trends and momentum. Obviously, it's not surprising to imagine that the third quarter would be slightly seasonally slower. Have trends basically continued? Have you seen any impact of COVID? Just in general, what are you seeing big picture out there, and how do you feel like you're set up for the third quarter? Hey, Rick. This is George. Thanks for the great question. I'm going to limit my comments, if that's okay, to Q2. I really don't want to get into what's going on in Q3 already, but as a comment that gets truncated June 30th, it was a really strong quarter, and we could feel the customers taking the products away from us during the quarter, and we're not trying to take any great credit. I think they've been waiting and a lot of these procedures got backlogged, and we felt that in Q2. The big guessing game, I think, around our company and medical device companies in general would be as you look at Q3, how does that continue, if it continues, or does it sort of play out in Europe a little bit more than it plays out in the U.S.? Maybe it's exhausted in the U.S. Those are unanswered questions for us. In Q2, we definitely felt it. We'll take a cautious wait and see approach to Q3 and see what happens. Then it's how much do people take vacations as well in Q3? Do people feel like, particularly the Europeans, "Hey, we're owed a vacation after all of this time," or do they say, "No, I want to go back and do my procedures, and we'll push the vacations into some other time." I don't know the answers to those questions, but we did our best with our guidance to try to answer those questions inside of our guidance. Got you. Maybe this is more for J.J. George talked about the U.K. staff, I think, and Canadian staff back at the facilities. You're talking about hiring, if I understood you, the manufacturing folks, and my sense is you think there could be manufacturing efficiencies. How do we think about the potential positive impact of all that? Maybe lower costs from getting everybody back on site, more manufacturing personnel doing something that helps. How do we think about the impact on margins going forward? Yeah. Thanks for the question. Maybe the first piece of it is in Q1 and Q2, Rick, you got some extra excess and obsolete inventory write-downs from product lines that aren't doing well or that we're sort of exiting or just sort of struggling a little bit. I think those abate for the second half of the year. Maybe there's a little help there moving forward. Seasonally, Q3 is typically a little bit better for gross margins, oddly as well. Maybe you get a little help there in Q3. In terms of the direct labor folks, we did lay off a bunch of folks for and during COVID, along with the other layoffs that we made. Those inefficiencies are coming through now. I feel like as you get into Q4, you start to run away from those. We've been working to hire more direct labor folks over the last month, and maybe you get a benefit from those sort of as you move forward. It's a combination of all those things. I think the other piece of it may be, Rick, is Artegraft's been doing really well. Artegraft has a nice, strong gross margin. To the extent that we continue to see strong quarterly numbers from Artegraft, that'll help the margin as well. Gotcha. Maybe just last for me, given the much-strengthened balance sheet, the greater financial flexibility, your strong cash flow, it's always hard. Somebody has to ask, and I'll take the fall. Maybe Mr. Roberts could discuss the M&A pipeline and just does this set the stage for even more activities? Just any update, any color there, Dave? Yeah. Hi, Rick Wise. Thanks for the good question. Obviously, we were very pleased with that equity offering. It was nice to pay off the debt, save a little bit of interest, have a clean balance sheet, optically for potential sellers, and just frankly, to have more dry powder. In terms of the pipeline itself, I would say during COVID, it did restrict travel a little bit. A lot of the congresses had shut down. We're seeing them starting to open a little bit, and travel's picking up a little bit. We are pursuing various targets. I think maybe an object lesson from the Artegraft acquisition a little over a year ago was for us to be considering larger targets. Artegraft is going very well, obviously, as you can tell. Also to borrow money. We've got a lot of EBITDA. We could leverage that. We are looking at larger targets these days. I would say our focus hasn't really shifted. We're still focused really on disposables and implantables used by vascular surgeons, maybe branching out a little bit into endovascular or cardiac surgery. We like the niche markets, and we can look a little bit larger. We just wanted to be prepared for that, and we'll see when a willing seller that meets all of the strategic criteria shows up. We will be ready for if and when that time comes. Thanks very much. Once again, if you would like to ask a question, please press star one on your telephone keypad. We have our next question from Matthew Mishan. Your line is open. Great, thank you for taking the questions. Just on the second half outlook here, I understand not wanting to give too much color around phasing in 3Q and 4Q and some of the caution here. I guess why would 4Q not be better than 2Q, given where we're at today? Yeah. And- Go ahead. You're talking about sales? Yeah Op Income? Sure. Okay. Sorry, you're looking at sequentially from Q3 to Q4 or from Q2 to? Yeah, Q2 to Q3. I can understand like Q3, we're still in a little bit of a gray area. People aren't sure what people are doing this summer. Q4 seems like it should be a little bit stronger than what you have implied in your, or what you have put out there for your guidance. Matthew, it's David B. Roberts. Good to hear your voice. Thanks for the question. I'll start it and then George W. LeMaitre or Joseph P. Pellegrino, Jr. may add in. Q2 was a unique quarter for us, particularly in the U.S. What we saw, what we all felt here in the U.S. was the COVID pandemic maybe lessening a little bit. We believe we did feel a backlog of cases come through, which is why we saw such widespread growth among our product lines, so many different products setting records. I think it was unprecedented. Now with the Delta variant, we're hearing about elective surgeries at some hospitals in the southeast shutting down, it's just Q3. Then, of course, we know that COVID likes the cold weather. We have to be a little bit cautious as we think about how to sequence in Q3 and in Q4. That certainly was a consideration, but I'll open it up to either George or JJ if they want to add on. There's the quick FX topic as well. We're a pretty European business, and we'll lose about $200,000 of sales going from Q3 to Q2. There's the CE marking thing, Matt. There's a little nuance here. While we were thrilled and we wrote a press release on May 25th to get those 5 CE marks, we have continued to put the message out there that 2 of the products that they approved, name and the more important one being XenoSure, they approved a device that we weren't making before the actual approval. They approved a device that had 4 years and a slightly different IFU, et cetera. Long story, but we had to start making the product all from new. We were selling, oddly and ironically, we were selling under derogation before May 25th. As of May 25th, you couldn't do that anymore in most markets. Post May 25th, for XenoSure in Europe, you should expect some struggle. Maybe that links up a little bit. I would say, we're trying to figure out My final point would be, FX, the CE marks, not really in Q3 being a great thing, but coming back in Q4. We should be fine in Q4 for all the CE issues. I'd say those are two big issues. We're a pretty European business, and normally, again, we don't know what's going to happen. Normally, those folks take vacations in the summer, and we usually see a downdraft of, I don't know, something like 3% or 4% from Q2 to Q3. Our normal seasonality would have projected these numbers as well. Yeah. Great. Thank you. I might add one more to this, which is you're trying to figure out the COVID pace of recovery in Europe in Q4, and it's kind of probably not something you want to get out on a limb on. Maybe if we think there's going to be a bit of an opening there, more folks going into hospitals, getting treatments, but not a crazy opening like we feel like we felt in Q2 in the U.S. Maybe that's a more sort of prudent approach. At the end of the day, and it's still a 7% growth rate, and tough sort of comps, if you will, as we got away from COVID last year. I still feel like it's a pretty nice number. Okay. Thank you for all the color on that. Just one last question. Just the pace of hiring for the sales force to get back up to where you were before, how long do you think that could take you? Right. Matthew, that's a great question. This is George LeMaitre again. Yeah, it's been a little bit frustrating. We've only picked up a net 2 sales reps in 3 months. I think the pace will start accelerating. The last time we spoke, I had 15 open requisitions, I believe, at the last call. I have 27 sitting out there right now. I've gone a little bit wider geographically. While I would say it's two-thirds or should be two-thirds an American issue because of this new Artegraft acquisition. We've gotten a little bit more, okay, well, we can fill in in Japan. We got that Japanese XenoSure approval and some stuff in Europe with the comeback of XenoSure in Q4 for XenoSure Europe. I don't know when. It does feel like it'll start getting a little faster. In the meantime, also in terms of teeing up the hiring machine. We've got a net add of about 2 new regional sales managers, one in Europe and one in the U.S. I think that's on a number of 15 or 16. You got more hirers, and I think with 27 spots open, you'll see it pick up. It's tough to guide when people will take jobs. I'm sure on all the phone calls you've been on so far, I'm going to guess folks are complaining a little bit about, "Hey, it's hard to hire people." I think we're running into that as well. Yeah, every single one. All right. Thank you, guys. Thank you very much. Once again, if you would like to ask a question, please press star one on your telephone keypad. We have our next question from Michael Petusky. Your line is open. Good evening, guys. A couple questions. JJ, I'm assuming sort of a pro forma balance sheet. Is it essentially zero debt and $50 million cash, roughly? Is that basically the math? I think that's directional. The raise was $54 and a half, and then there's 6% or so for the banks. We keep the rest, take out $23 of debt, and then you can take the rest of that and put it onto the cash balance. Got it. All right. Dave, I guess I wanted to ask, in terms of just some of the targets you're looking at, I know some of these conversations go on for several quarters or multiple years or whatever. When you look at sort of the, whatever the number of targets are or conversations that are going on, are there sort of Artegraft-size deals that you would say you are in meaningful conversations with at this point? Yeah. These discussions can turn on a dime. I would say I've got a handful of opportunities that range up to $25 million in revenue at the moment. Artegraft, you'll remember, its trade sales were $15.6 million in the LTM period prior to the acquisition. Its hospital sales, Michael Petusky, were $18.6 million. There are opportunities that are larger than Artegraft, and there are opportunities that are smaller at the moment. Sure. Okay. All right, great. George, if this variant issue heats up, are there things that you all learned just in terms of getting employees back to work and whatever social distancing, PPE, et cetera? If this variant does sort of become a thing, are there things that you sort of learned in 2020 that you think will make it easier to keep your folks healthier? I know nothing's foolproof, I guess that's the question. Yeah. Sure. Okay, the things that we learned. I think there may also, maybe more so than us, I think it might be the employees themselves, and I can't speak for all 400 of them, but I think they've all come to terms with COVID in their own way, and they're watching us. We have all these distancing watches, and we check temperatures on the way in. We're all spread out in all our facilities. I think they've learned, oh, there are no COVID spreads within LeMaitre Vascular's building. I think there was one documented spread, and I think maybe it's more what they've learned about what the risks they're willing to take on weekends at dinners and things like that. We've called them back to work. We really didn't get much blowback on that. We were happily surprised. There's a couple people that needed some variances from what we were selling to everyone. It's been nice. We haven't heard anything about it. I think for now, we're good to go. I think people are learning how to handle this thing better. I think it's more about the employees and their approach to us rather than what we're learning. We're now still doing the same thing we've been doing for 12 or 14 months with all these distancing watches and six feet and everything like that. Okay, great. I'm curious, has Artegraft now passed Valvulotomes as a product category, and just in terms of top-line revenue? 6.7 is that. I would say that the whole category of Valvulotomes, no, it hasn't passed that, but it's gotten past some of the brands, some of the individual brands. We have two or three brands inside of there. The whole category, no, the Valvulotome's still the largest category at the company. Okay. Is that north of $30 million? I don't suspect it's north of $40 million. Hang on a second. I'm happy to tell you what the Q2 number was. Let me just get it. J.J. or Dave, do you have that handy? I have the organic number, I think. I don't know. Q2 Valvulotomes, $7.7. Gotcha. The Artegraft, just for everyone following along, is $6.7 in the quarter. That includes allocated shipping for both product lines. All right, very good. Thanks. Congratulations on the continued I can't believe if you had told me we'd be here a year ago, I wouldn't have believed it. Congratulations. Thanks. Thanks, Mike. There are no more questions at this time, presenters. Okay, thank you. Thank you very much, operator. I guess it's time to hang up. Okay. 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.