Welcome to the LeMaitre Vascular Q1 2023 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. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead.
Thank you, operator. Good afternoon. Thank you for joining us on our Q1 2023 conference call. With me on today's call is 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, May second, 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. Sales grew 22% organically in Q1, 13% price and 9% units. Our five largest product lines led the way. Valvulotomes were up 29%, carotid patches increased 17%, bovine grafts 22%, allografts 42%, and carotid shunts 18%. By geography, all three regions reported growth. The Americas were up 21%, EMEA was up 17%, and APAC was up 6%. At least on the Q1 sales line, it felt like we were in a new movie, everything, everywhere, all at once. The growth was partially driven by the improving macro environment you've already heard about. Procedure volumes increased in Q1 as hospitals staffed up their ORs to pre-COVID levels. We also saw growth from three LeMaitre-specific items: pricing, a larger sales force, and competitor stumbles.
In Q1, we realized a 13% price increase, largely from our domestic valvulotomes and European shunts. We also had 128 sales reps on March 31st, 14% more than we did a year ago. We plan to end the year with 135-140 reps. Finally, in Q1, we benefited from competitor stumbles, which came in two flavors, back orders and abandoned European MDR approvals. While many of the back orders have resolved, several competitors have withdrawn their products from Europe due to the high costs of gaining next-gen CE marking. I'd now like to give an update on our continued expansion efforts in Asia Pac. Our new office in Seoul is up and running. Korea sales are trending above previous expectations, we should post a 2023 top line of $1.5 million.
This is about double the historical sales volume to the ex-Korean distributor. This subsidiary should also turn a small profit in 2023. Additionally, we recently agreed to buy out our Thai distributor and plan to begin selling directly to Thai hospitals in Q3. This will be our 29th direct market. In other APAC-related news, in Q3, we expect to receive Japanese approval for an additional XenoSure indication for use in the carotid artery. Our Q1 annual run rate for XenoSure in Japan is $1.9 million, so this additional indication could be meaningful. Currently, our Japanese sales force market XenoSure only for use in the femoral artery, whereas worldwide usage of XenoSure is typically in the carotid artery. With that, I'll turn it over to Dave.
Thanks, George. On April 20th, we signed a three-year agreement with the Aziyo Biologics to be the exclusive distributor of their cardiac patch product line in the U.S., with an option to acquire the worldwide business during year two or year three. Excluding the initial inventory purchase, there is no upfront payment. 2022 U.S. sales of these products were $6.8 million. We now have several patches in our portfolio. Perhaps some clarification is warranted. XenoSure is a first-generation bovine patch used primarily by vascular surgeons. CardioCel is a 2nd generation anti-calcification bovine patch used by cardiac surgeons. Aziyo is a 3 rd generation porcine patch designed to be resistant to infection and to remodel into healthy tissue. Aziyo is used primarily by cardiac surgeons.
LeMaitre expects to record Aziyo sales of $800,000 in Q2 and $3.8 million in the full year 2023, with a 50% gross margin. With that, I'll turn it over to J.J.
Thanks, Dave. Q1 2023 sales were $47.1 million. An increase of 19% on a reported basis and 22% organically versus Q1 2022. We're now guiding 15% organic sales for full year 2023, as we expect sales growth to moderate as hospital procedure volumes may begin to normalize. In Q1 2023, we posted a gross margin of 65.6%, flat versus the prior year period, as average selling price increases and manufacturing efficiencies were offset by FX headwinds and unfavorable product mix.
Going forward, the addition of the Aziyo product line will decrease our gross margin by about one half of 1%. We increased our direct labor manufacturing team by 54% in 2022. This increase in personnel has already helped us mitigate issues related to the MDR transition, product line changes, and supply chain disruptions. Training of this larger staff has driven inefficiency, however, which has hurt the gross margin. We have begun to see improvement in this area. Gross margin guidance is 65% for the full year. Q1 2023 operating income was $7.9 million, reflecting an operating margin of 17%. Operating expenses increased 28% in Q1 versus the prior year. Much of the increase was due to higher selling commissions as Q1 sales significantly surpassed sales quota.
In addition, we had 16 more sales reps versus the prior year and resumed our three regional January sales meetings. Regulatory costs were up 47% in the quarter as we continue working to obtain our MDR CE marks. We expect to slow the growth of operating expenses as we move through the year. Indeed, headcount of 591 was flat from December 31, 2022 to March 31, 2023. For the full year 2023, we expect an operating margin of 18% and EPS growth excluding special charges of 17%. For guidance, please see our business outlook issued in today's press release. A few highlights include reported sales growth of 15% in Q2 and 18% in the full year. Organic sales growth of 13% in Q2 and 15% in the full year.
Reported EPS growth of 103% in Q2 and 29% in the full year. Non-GAAP EPS growth excluding special charges of 10% in Q2 and 17% in the full year. With that, I'll turn it back over to the operator for questions.
Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment. Our first question will come from Matthew Mishan of KeyBanc. Your line is open.
Hey, guys, this is Brett Fishbin today for Matthew Mishan. Just wanted to start quickly on the quarter. You definitely touched on three of the key drivers at a high level, driving some of the outperformance on the top line. Just wondering if you could expand a little bit on what you were seeing specifically in the Americas and EMEA, maybe around like what type of procedural trends took a step up versus expectations, and then, like, maybe where else you were just surprised versus the outlook coming into the year.
Brett, this is George. thanks for your question. Actually, you guys, the KeyBanc team, sends around a fantastic report about the credit card swipes that take place in these hospitals. When we looked at that, I think it sort of says it all. There was 14% more KeyBanc credit card swipes in Q1 in USA hospitals, if I got this right, and you're welcome to correct me by the way, since you sent the data out, versus Q4. It was a very strong sequential change between Q4, where we sold $41 million worth of medical devices, and Q1, where we sold $47 million worth of medical devices. Again, I think we're 68% Americas. This is where it happens for us, and I think your data captured a lot of what's happening.
The hospitals are open for business and doing procedures.
All right. That's really helpful. Then I was also just, you know, looking ahead at the guidance, a pretty nice step up. It seemed like to me a lot of the upside in 1 Q might have been driven by volume just based on how you quantified it, maybe some upside on the price side as well. Is that something that you expect to continue in terms of what's driving the increase in guidance? Like, are you expecting an uptick in actual volume versus the initial outlook?
Yes. I think for the full year, if you're thinking of the drivers, you know, the pricing topic probably sticks with you in one form or another. It may not be 13% quarter in and quarter out. There's a mix issue underneath that. That seems particularly robust to me. Maybe it's not quite that, maybe it is, but we'll see. The hospital procedure piece, I think we're assuming that there's gonna be some return to normalization over time. There'll be a little bit of a step down in that. Maybe there was a backlog topic in Q1, and you sort of work through that in Q2 and Q3. So elevated levels still, but not like you saw in Q1. The third piece for the full year is the Aziyo distribution agreement.
You know, $3.5 million- $4 million of sales may be coming from that in the year. I think those are your big chunks as you think of guidance for the full year.
All right. Really helpful. Actually last question, just to clarify the point. I know there was a little bit of a tailwind expected from some of the Omniflow back orders, and you thought that it would be resolved by the end of 2Q. Could you possibly, like, quantify how much of a tailwind that was this quarter, if you still expect it to go away next quarter? Thanks very much.
Sure. Thanks a lot. Omniflow grew year-over-year in Q1, 1% on a reported basis and 4.8% on an organic basis. A little bit of a year-over-year tailwind. Specifically on the back order, things are improving. I would say largely we're still holding to that estimate that the back order will be cleaned largely by the end of Q2. For some real facts here, approximately at the beginning of this year, we came into the year with $800,000 in Omniflow back orders, and we ended Q1 with $400,000 in back orders. We pushed an extra $400,000 through the to cut that back order. Again, to go year-over-year here, it was up 1% reported.
What didn't really help us at all, but it was nice to not be suffering like we were in Q4.
All right. Thanks very much. I think that probably clears up that not too much of the beat was driven by that or anything one time. Thanks again for taking the questions.
Thanks a lot.
One moment for our next question. Our next question will come from Rick Wise of Stifel. Your line is open.
Good afternoon, everybody. Apologies, George, I am juggling three calls tonight, and I missed the very start of your comments. Maybe you commented on it, but I wanted to touch on the sales force. You had 131 reps at the end of the year. You have 127 this quarter. I assume just normal attrition. What are your thoughts about this year, and do you have the right number? If this is the right number, does that suggest all things equal, and I appreciate there are a lot of moving pieces here, maybe a little more operating leverage as the year unfolds?
Right. One of the things that we're saying here, Rick, is that we have 128 reps right now. We had 131 at the end of the year. We continue to plan to be around 135-140 for the year. There's still, let's call it seven or nine more, reps that will be sitting on the P&L by the end of the year. If we're looking for leverage, I don't know if we'd get it there, but that's not that many. What's that's an addition of, I don't know, 7% or 8%, if that's part of your question. I mean, we do have op margin keyed in for the year at about 18%, and I think for the guidance, and I think we posted a 17%.
Am I doing that right?
Yes.
In Q1. Rick, in short answer to your question, there's a little bit of leverage here. The other key fact here I think that we wanted to focus on is that we ended the year with 590 employees, and at March 31st, we only had 590 employees also. The slowing down of headcount growth, not just reps, but all headcount, really began about October, November of last year. We stopped approving hiring requisitions largely. We're slowing down, and I think we're knowing we need to get better leverage at the end of the year than what you're seeing in the Q1 report.
Gotcha. Gotcha. Maybe a question for Dave. Dave, that was a great quick and certainly clarifying perspective on the patch, first, second, 3rd- gen, and I'm clearer now about the Aziyo patch opportunity. Can you give us some clarity on the potential opportunity and what you think you're going to be able to do with the product, maybe that hasn't been done or, you know, just is it about, you have more reps, you can be more effective? Just any more color there that helps us appreciate, better appreciate the opportunity.
Yeah, sure, Rick. Thanks for the question. Aziyo had was selling these patches primarily through their own relatively small to LeMaitre direct sales channel, of maybe about 12 or so reps. Plus they had a handful of independent agents. That channel was selling primarily a different and very interesting product they have, which is used in EP, which is a biologic pouch. Really for them, it was a strategic choice to focus their sales team's efforts on that product. They were looking for a home, and they recognized that LeMaitre has a relatively large sales force in the U.S. We have 64 sales reps in the Americas, probably about 58 or so U.S. sales people.
We're very familiar with the patch space with XenoSure and CardioCel selling both peripheral vascular and cardiac surgery patches. We just felt like it was a really good combination. It's a very interesting patch. It, if, when it's implanted properly, it resorbs in the body, which can have a lot of benefits, and neither one of our patches does that. It's a very good fit. You know, we're very pleased to have signed the distribution agreement. We have an option to acquire that you're aware of. We're excited to see where it goes.
Does this deal in any way preclude you from pursuing other M&A? I know that you're always anxious to share with us your specific plans.
No. I mean, well, first of all, the transaction is complete now. We actually didn't put any upfront cash into the deal, so it didn't really affect the balance sheet at all. In fact, we expect it to be accretive, as we've described. If anything, it should improve our balance sheet for future deals. Something that's interesting is it came with a fairly large number of customers, which always is good in terms of when we do future acquisitions, having more cross-selling potential. Frankly, you know, the deal, it was very straightforward, so it didn't absorb an inordinate amount of bandwidth. The answer is no.
We're, you know, we're out there hunting just as we were before this deal. I don't think it slows us down at all.
Great. Just a last one from me. It's maybe a little more commentary on thinking about the growth that we saw in the quarter, sort of the volume versus price versus the procedure recovery aspect of things. To what extent did price help you out in the quarter overall?
Sure, Rick. Yeah, it was, it was pretty straightforward. Price was 13% and unit growth was 9% to make up that 22%.
Gotcha. Thank you so much. Nice to see the strong start.
Thanks a lot, Rick.
Again, ladies and gentlemen, if you would like to ask a question, please press star one one on your touchtone telephone. Again, for any questions, please press star one one. Our next question will come from Michael Petusky of Barrington Research. Your line is open.
Hi. Good evening, guys. Strong quarter. Well done. I guess let me start. Dave, is there a risk that the Aziyo business in any way cannibalizes CardioCel or other business that you guys have?
You know, the Aziyo patches are primarily cardiac patches, and as you are pointing out, CardioCel is also. You know, as we negotiated with Aziyo on this, they fully understood that. Obviously, I think that the key idea is when we have a customer and a current customer is using CardioCel or a new current customer is using Aziyo, then we're gonna support those customers with the current products. Of course, there are a lot of customers out there who are using neither. For us, it's just extra optionality for our sales reps to present to those specifically cardiac surgery customers. I don't really see it as a conflict. I see it as additive to the bag and like I said, we'll be supporting each set of customers going forward.
Awesome. I guess, possibly George, but anybody who wants to weigh in on this. The valvulotome, it's a mature product category. To get 29% growth on that is just sort of stunning to me. Can you guys describe? I guess price was a big part of it, but I guess how were you able to raise price on this type of product in this, in, at this point in its lifecycle? I mean, had it just not had a increase in a while or was there an innovation? Can you guys just speak to what's underneath that 29%?
Sure. A couple things. Maybe I go at units first, and as you're pointing out, it's mostly price, but still there's some unit action here too. You remember that January 2022 was a Omicron. It was sort of the last gasp of Omicron. Q1 2023 versus Q1 2022, you're getting a little bit of a lift. I don't know what it is in this 29%. I can't even guess. Maybe it's 5% or something like that because January of 2022, excuse me, was so weak and January of 2023 was normal. You get a little bit of that. There's some of that. Even if you look at the Q1 units and you annualize them for valvulotomes, we are seeing something like, I don't have the number with me here, but I think it's something like a 5% or 8% annualized unit growth rate on valvulotomes versus last year.
That's not very typical. We don't grow them that much. One possible reason is there was a really important study published in December, although I don't know that this is true, this is just a possibility, called BEST-CLI. BEST-CLI is coming to the surgeon and the radiologist and it's saying, and the cardiologist, and it's saying, you know, this bypass that you do with a valvulotome is usually more durable than putting stents and using angioplasty balloons in bodies. It's a very big study. It was published in The New England Journal of Medicine. Very important study for us. Maybe that's helping out. There's a couple answers there.
I know it's not perfect here, Mike. Finally on the pricing, we bought the Eze-Sit valvulotome in 2019, and we finally, this year, going into this year, we finally said, you know what? It's too complicated for the customers to see one price on the Eze-Sit and one price on the old LeMaitre valvulotome. They're all the same now. I would say that was sort of the key pricing move, was to just bring the two of them to the same level to deconfuse anyone about what the price of a valvulotome was. It was a hefty price increase for that reason. I agree with you when you're you know, supposing, wow, it's late in life, what happens? Maybe this is a validation of LeMaitre's niche-y business plan.
We try to be, you know, number one or number two in these markets, and there's not that many competitors hanging around. We, you know, we do feel like we have some pricing power in some of these product lines. Mike, I can give you some more.
Detail on numbers from my private reserve that George hasn't seen. In Q1, it was up 29%. 19% was from ASPs, from a price hike. 10%, I guess, units. Of that, if you split it between the Eze-Sit and the HYDRO, the Eze-Sit was really the bulk of the increase, you know, a 30%+ increase. HYDRO sort of in the normal range, high single digits, you know, kind of answer. It really came from that Eze-Sit piece, and 19% of the increase was ASPs for valvulotomes in particular.
Awesome. J.J., while I've got you, I didn't catch. I heard the $800,000 in Q2, but I didn't catch the full year CO contribution.
For the full year, sort of baked into our guidance is about $3.7 million-$3.8 million.
Okay. Last item, I guess. Just because you guys have these, you know, building cash and included in that is marketable securities. What's your assumption, I guess, on interest income for the remainder of the year or by quarter, or however you wanna break it out? Also, I'm just curious, tax rate's still, you know, roughly 24.5%-25%. Has that hold up? Thanks.
Yeah. 24%- 25%, depending on who's exercising options, it'll be lower if you have more. Our normal sort of ETR operating, if you will, is sort of 25.5%. If nothing weird happens, you're sort of at that level. For interest income these days, Mike, you know, we're kind of at $600,000 or $700,000 a quarter, something like that. Probably closer to $700,000 these days.
There's no unusual items. You know, you're doing more than a $0.5 million on that line going forward a quarter.
Yes, that's right.
Outstanding. Thanks, guys. A really impressive start. Thanks.
One moment.
Thanks, Mike.
One moment for our next question. Our last question will come from Scott Henry at Roth Capital. Your line's open.
Thank you. Good afternoon. A couple questions. For starters, I always like to ask, could you give me the mix between biologics and non-biologics?
49% biologics.
Okay, great. Thank you. Just as a follow-up to the conversation you just had on valvulotomes. With regards to price increases, if we think about price increases in addition to inflation, so you know, excess price increase, how much room do you believe you have for your product lines on pricing? Do you get much pushback? Does it vary? Just how should we think about the sustainability of being able to put through price increases beyond inflation?
Okay. No, that's a good question, and I think your question would be even more full if you said depending on when you do this because right now, in December and January and February, just that we came around the corner of the year, very little pushback on everything we did. I was just visiting our European subsidiaries last week, and the European reps who are very conscious about price hikes were making remarkable statements to me like, George, no one cared. It didn't matter. They're so nervous about not getting supply from their manufacturers that they're just happy you're talking to them right now.
I think the supply chain dynamics and then also the external inflation in Germany of 10%, let's call it. Those two things conspire to when you put a 13% price hike at these hospitals right now, at least for now, they're not blinking. You know, two years ago, four years ago, before all this, that was not the case. You know, we have this chart in our, in our online PowerPoint presentation about the company where we call out these price hikes, and I think we did 13 in this Q1, and you guys help me out, 8% or 9% in the last two years before that. You got a little bit more pushback two and a half years ago, but nothing right now.
Okay, great. Thank you for that color. That's helpful. Just on the model, a couple numbers. I noticed G&A was a little bit above trend. When I look at sales and marketing, I usually calculate expense per rep, which was a bit higher than it's been in the past. You know, are those trends, or is that noise? Just how should we think about that?
In the quarter, you're asking year- over- year, I think, maybe that language. G&A up 9% year- over- year. I'd say a few more hires, a few more employees, and then COLAs, cost of living salary increases year- over- year, and then more T&E. We're definitely traveling more, I think, generally speaking. I think that's what's driving that 9% growth. Selling and marketing up 39% year- over- year. That's a number of things. One is, as George was talking about, more reps, 16 more reps year- over- year. But also commissions were significantly higher in Q1 than sort of year- over- year or run rate or however you wanna look at it, and that obviously goes hand in hand with the higher sales.
Quotas for sales reps were made, you know, back in October, November, December, and Q1 turns out to be a fantastic quarter. Cases are up, commissions are way up as well. That piece of it, you know, that will stay high. If the sales piece stays high, that hospital backlog, quote-unquote, or case search stays high and it'll come and normalize if it comes down. We'll see. The other piece in Q1 is the sales meetings. We have typically historically done annual sales meetings in January for the Americas, for Europe, and for APAC. We were off last year, but we were on this year, and so that's a decent number for the year-over-year comparison.
Okay. great. The final question, when I look at the Aziyo transaction, I mean, it looks just like the type of deal where you wanna try out the product for a couple years, and if everything looks good, you buy this. Obviously, you have the options. I mean, is that a fair way to think about it? If this is as good as you hope it is, that this is something you would want the entire thing, and this is more of a process to understand the product better and to get a little, you know, more sharpened pencils on the transaction.
Yeah, Scott. you know, we've been familiar with this product line for a while, but of course, you never get a perfect due diligence look. And for us to have it in our own bag and be selling it ourselves in the United States is just a really good way to try before we buy. That's exactly what it is. you know, if we do exercise the option, I imagine, you know, as we talked about, it was $6.8 million of revenue in the U.S. There's a little bit OUS, it would be the third biggest acquisition LeMaitre would have done, or, you know, if it grew, it could be the second. it's not small for us. Of course, you know, we have our sights set on larger transactions going forward.
No, this is a nice size transaction, sort of a perfect drop-in for LeMaitre, except this time we get to try it out before we buy it.
Okay, great. Thank you for taking the questions. Congratulations. Really strong results.
Thanks a lot, Scott.
One moment. I am showing a follow-up question from Michael Petusky of Barrington. Michael, your line is open.
Yeah, J.J., rather than texting you later, I was wondering if you could.
Well, I'm driving.
Exactly. Exactly. I wanna keep you safe. stock-based comp, CapEx, and cash flows from ops.
$1.290 million for stock-based comp, $1.09 million. Appreciation and amortization, $2.351 million. CapEx, $2.13 million.
I'm sorry, did you give cash flow from ops? It cut out there for a second.
Uh, $2.28 million .
All right. Thanks. Have a good night, guys. Thank you.
You bet. You too.
Thank you.
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.