Q1 2020 Earnings Call

Ladies and gentlemen, today's conferences comes to begin shortly please continue standby and thank you for your patients.

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Welcome to the meat vascular Q1, 2020 financial results conference call.

As a reminder, today's call is being recorded.

This time I would like to turn the call over to Mercy J.J. Pellegrino Chief Financial officer of the meat vascular. Please go ahead Sir.

Thank you Chris <unk>. Thank you for joining us on our Q1 2020 conference call, let's see on today's call, our chairman and C.E.O. George Let me.

And our President David Roberts your information to the social distancing, we are holding this call from our respective homes. So we apologize for any audio difficulties.

Before you began I'll read her safe Harbor state.

Today, we may make some forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act 1995.

<unk>, which is something to risk uncertainties wherever possible. They will try to identify those forward looking statements by using words, such as the leave expect anticipate pursue forecast.

Similar expressions.

Notably on April 13th we must to our 2020 guidance, which we issued on February 620 20.

He's refer to the cautionary statement regarding forward looking information on the respect isn't my most recent 10 K. subsequent F.T.P. filing.

Hurting disclosure in fact is like <unk> different mature really come knows expressed or implied.

During this call it might discussed on gap financial measures, which may include organic sales growth numbers as well adjusted operating income growth operating income excluding certain lunchtime games, the Chargers Eddie but.

Reconciliation of gap to non get measures discussed this call. If any is contained in the associated press release. It is available in the Investor Relations section of our website W.W.W. Dot dot com.

I'm trying to call.

Right.

Thanks J.J.

Today's prepared remarks will address for aspects of the current crisis.

No one will meet social distancing and work rules driven by covered 19 number two the operational impacted covert 19 number three the sales impacted called the 19 and finally number four <unk> financial response to covert 19.

After the prepared remarks will open up for question.

Today's call will not include Q2 or 2020 financial God.

That's the first section social distancing and work rules in early March we instituted social distancing measures that all of our offices and factories.

All employees, whose jobs can be done remotely were told to do so we also transition production in our larger clean rooms to to shift to reduce employee density.

Our internal rule now forbid airline travel in sales Rep Hospital visits.

We have been making case by case sales rep exceptions as some states in countries open up.

As is widely reported most hospitals are not currently accepting visitors.

Second segment would be the operational impact you cope with 19.

Began crisis with $41 million of inventory equating to 12 months on hand, and all four we'll meet factories are generally operating at near normal production capacity, but there are a few items worth discussing.

As the this conference call for other employees are known to have tested positive for Kobe 19, the last of which was discovered April 22nd.

Response has been to temporarily shut our clean rooms and to reopen after thoroughly disinfectant.

I mean, probably come clean room has been closed for a total of nine working days since the crisis began.

Also recently, we experience somewhat elevated absenteeism.

Burlington Cleveland.

Likely due to the high levels of Kobe, 19 in Massachusetts, and our employees understandable desire stay at home.

Including the government's family first sick leave entitlement or American employees can get up to 17 days sick time off with full or partial pet.

We also planned to reduce production hours by 17, excuse me, 70% in our French factory.

Sunday availability of a government furlough program there.

We can reverse this in our election.

So probably experience no material hope it driven supplier disruptions.

So we are monitoring the well chronicled situation at American avatars and acknowledged this as a potential supply risk for three products Xena shirt bovine patches pro call bovine graphs and elbow graph.

Cardio sell bovine patches source from Australian average wires were covert 19, instead less impact.

So far we've experienced no covert 19 related supply issues from the four avatars, we work with in the U.S., New Zealand and Australia.

Additionally, we've had almost no logistical interruptions in getting our products from our factories to our nine warehouses and then onto our customers shells.

Quarters continue to leave our shipping docks daily and cargo shipments to Europe and Asia continue to fly.

The rise of European country border checkpoint has also not material impacted our delivery So hospital customers My Frankfurt warehouse.

The third section I like to discuss these sales and financial impact of Kobe 19 automate vascular.

All things considered to one was a nice sales Porter.

America is we're up 12% Yeah me, a 3% eight pack was down 11%.

However, beginning in mid March we began to experience significant revenue disruptions, which seemed to impact southern Europe. The quickest in the most.

Or Italian sales were down 14% Q1 in France was down 10 per cent.

Of course, we experienced revenue issues in China throughout Q1 with sales down 70%, but try to account for only 1% of our sale.

In total we estimate a cue one sales loss of between 500000 in $1 million do the covered 19 crisis.

Well generally seller devices into the country's at the G. 20, and it. This date most hospitals continue to focus on the covert 19 crisis differing elective surgeries.

Also most <unk> vasselin patients are older than 60, and it stands to reason that they will hesitate to enter hospitals in the very short term.

But in a long term, we expect the lion's share by procedures will return to the hospital someday and most what we're trying to get done.

You can't put off forever and insight to bypass or a surgical graph to save your foot.

Annual eventually need to have your carotid and darted recognized and patch to possibly avoid a future stroke.

When this happens in when countries in states decide to open up are quite unclear.

Finally, the fourth section and like to discuss is well mates financial response to Kobe 19.

In response to the sales decline so we've already experience.

As well as anticipated future sales decline, we implemented to cost cutting measures.

The first of these was a reduction in force.

On April 14th we initiated the 51 employee risk, which was a direct response to cope with 19.

We had previously competed completed 33 employee risk in February 2020, and some more generalized belt tightening.

When these to restore fully implemented we expect dark total headcount will be down by 84 or approximately 18% to 375 employees.

Notably our sales Rep headcount was cut by 26% or 29 reps bring us down to 83 reps when the rest is fully implemented.

The second measure was salary reductions we've temporarily reduced base salaries to the end of 22, one for all employees, earning over $40000 a year.

Cuts.

<unk> progressive ranging from 90 per cent for me to 50 per cent for David J.J., and then down to 12.5% for low paid employees.

Employees, earning less than 40000 did not receive salary reductions.

Hours were cut 10 per cent in the transition to two shifts and six day work weeks.

Salary reduction had to be different overseas due to localize in government programs.

We expect a net savings from all of these cuts should total approximately 13.5 million in 2020.

Which is about 14% of our total 2019 spending that would include off expenses as well as costs of goods sold expenses.

We could also look at these cuts as 12% for about 2019 sales.

You will be a natural activity based decline 2020 off expenses due to decrease as an executive travel trade show Booth sales Rep teeny and the like.

We have not yet been able to quantify these savings.

At March 31st <unk> had 30.6 million of cash and no debt.

We expect that are strong balance sheet and continuing commitment to profitability should position us to withstand the economic effects of the call. It 19 crisis.

Would that will last Chris to open the call up two questions.

Thank you.

And ladies and gentlemen, as a reminder, <unk> Oh, she really depressed star one on your telephone.

All your question. Please press the pound key.

Please stand while we compiled the <unk>.

And the first question comes from the line, Jim Cydonia would sit Dodian company deadline is now open.

Oh good afternoon can you all here me.

Yes.

Great. So.

The the reduction in in a force or are these employees considered farewell and then can they be called back when our procedures resumed.

No. This was this is a true lay off if you will.

Okay. So you'll have to hire these people back.

You know when when demand gets back to work more historical rates.

That's right Jim that's how we thought.

Right and I'm I'm before this all started you would had plans to consolidate a couple of product lines into.

Into your facility up in Massachusetts is that still going on.

Yeah. So the one big one was the closure of the Australian factory in Melbourne, and that's still going exactly. According to plan that facility. We closed in late May early June and we will be building products for human use in Q3. So that's a big one the other not to confuse every.

But the other Australian product, which is we're buying from a company in Perth right now we're transitioning the manufacturing of that it's called cardio sell it and we bought the neatest Rand that's transitioning to Burlington, Massachusetts, Jim that's been slowed down a little bit because we can't build our cleaner in Massachusetts.

Construction is no he's not able to be done but of course the minutes Governor signals all clear we will keep building the clean room, and we'll continue with that transition.

There's a third transition you might be talking about also which is the syntel in Python product lines coming from California to Burlington. They were part of that applied medical I acquisition that we did a couple of years ago and that is definitely still on course, we will be finished with that transition.

In Q. to work you three of this year.

Right and then I'm, sorry can you repeat the comic debate about 12% sales reduction was that related to that sales force.

Yeah. So I you know what we were trying to find a way of course since we can't give guidance. We're trying to give you a side thing on this costs cut to the cost cuts 13.5 million and if you wanted to look at it as a percent. The 2019 sales. It's so strange metric I'll give you a gym, but that's what.

We got which is it's 12% of a sales and 2019. If you wanted to look at it as a percentage of our total total spending in 2019, 14%.

Okay.

Right I I understand that and.

Are there any of the procedures that you perform where do you think the patients.

I have to come back at some point.

No we I I hate to be picky about this but we don't see this like a hair cut where you know you you skip a bunch of haircuts and then you have the hair cut after cobin. We we think these are going to have to come back. So in general are going to have to come back.

So.

Point.

I know you can't predict the timing nobody can but at some point over the next 12 months.

Hospitals are going to want to do procedures, because they're losing money. There's no reason to think that this business will be won't be there you know so at some point, maybe late 2020 or early 2000 or 2021 at some point.

Yeah see him in fact, one of the things I discovered we're all learning. These were all bumping into these new aspects of the crisis, but on this point I realized that the Doctor is really want to get back to work regardless of what's going on they have a need to work they like to work they want to be in hospitals working so I think.

There's going to be a lot of <unk> doors, driving things back toward normality in hospitals as the covert banking patients are dealt with so yes, I agree with you.

So the last one for me is when you start to do that how quickly do you think you can.

Rehire sales folks because it sounds like you're going to need.

Well, that's I mean, that's a very long way away. So I think what we were thinking about right. Now is just get through this quarter things are kind of coming at us in a rush. So yeah. It may be something we do it may not be something we do I will say that in this in this rip we haven't.

Withdrawn ourselves out of territories, we still have a bunch of American wraps, a bunch of European reps and a bunch Asian Asiapac reps. So we haven't we haven't gone away from territory's, they're just more thinly covered for now so we'll see how that goes and then we'll respond or opportunistically.

Alright, thank you.

Thanks.

Thank you.

And our next question comes from the line of Jason Males with Ken. According to what are your mind is now.

Hi, This is actually used to tell Ya on Craig's, Jason I'm, sorry, I'm just wondering if you could just as I or whatever it is correct.

I'm a Christian did your standpoint near Mikes in U.S., and how it's kind of trying to tune marks and now any fun. How centers are looking at making that kind of any insight you have just in terms of outreach from our products, if you're kind of thing any form.

I know trend.

<unk>.

Right you know cecelia, we debated a lot whether to get into the whole April thing or not because we've started seeing what april's like and we really felt like it's not appropriate to dig into April. So if you look at if you look at March what happened in procedures I mean.

I don't I'm not distinguishing much between procedures and revenues, but they're definitely you definitely felt that in the last two weeks of March there was it was fairly obvious when it started happening and when it happened in China, the whole quarter and then in Italy, we kept being surprise you kept reading stuff from newspapers and nothing bad what's happening.

And then all the sudden in the back of March It started happening. So procedure volume was clearly dropping in Italy, France was certain expense, Spain, and then also the U.S.

Okay. Thank you that's <unk>.

Just as a follow up to <unk> kind of looking back pre code at times, but I was curious to provide some color just with ASCII sound on the salad I like interesting just from a competitive standpoint to me about it go up against some of the other products.

I'm just in your early days without pot.

Sure. So it's always hard to tell you how these acquisitions are doing against <unk>.

I thought maybe I'll have Dave take that.

Yeah, Hi, Celia.

A good question.

We actually from a competitive standpoint I think.

They cardia sell products and I'll baskets l. in there is is beating our expectations as you know and Q4, we did a little bit better than expected. It. So we increase the full year guys and for courteous cell in baskets l. to seven.

$1 million and then Q1.

We just registered at 1.9 million in sales the parties Sebaski cell, which.

Hey, like this the $7.6 million, so it's doing better than we expected I think.

Headed to believe we're finding it it it fits well inside of our sales bag in our reps are paying attention to it and I would also add that and as you know unusual <unk> period that we're having a lot of the cardio sell products are used.

Congenital heart defects and those procedures seem to be standing up pretty well. So I would say the early returns the early precincts reporting on the parties sell inside of we'll meet our positive.

Great. Thank you both credit color.

Thank you <unk>.

Thank you.

And as a reminder, ladies and gentlemen that is star one on your telephone into a jogger question. Please press the pound key.

So our next question comes from the Mando, Frank taken with like Street capital markets and <unk>.

Hey, Thanks Oh.

Oh, I guess have a couple of questions here. So I wanted a first start a little bit more broadly speaking just based on the eliminate business bottle. So the way I think about it is there's a diverse amount of products in a diverse amount of geography. So therefore, I would feel that it fares slightly above average to some of your peers.

As you go through time like this where it's choppy, where some geography to better than others. Some products to bear obviously there's.

Varying degrees of severity within their respective procedures as well. So I was hoping you guys can give a summarized view of how you feel you are going to come out of this based on what you've seen in the end of March.

Impaired to the early days of April based on what geography, you feel are going to come back strongest in what products you feel are going to come back strongly to a rebound coming out with us.

Okay. So there's a lot in there and I would say I'm gonna keep trying to stay away from anything sort of forward leaning I will say your initial supposition about <unk> being really well diversified bike country and also by product line.

Cliche you doing the heavy lifting for me on this call, which is that's an important.

Facet of the company is that we aren't really well diversified so you're going to see we know we're going to see different answers in different countries, and we'll probably be able to get some information early from certain countries that will lead us to do certain things and other countries. So we're excited about the diversification of the company I think it's very clear from the press.

Japan has been less impacted from all this and it's that's a big piece of who we are I think for about 4% I rather than just about 40% Japanese we started in Australia in 2013, great success. There So Australia, New Zealand again, I'm going back to the press clippings here rather than what's happening inside.

<unk>, but it stands to reason those two countries are going to do really well and then some of the distribute distribution markets like Taiwan and Korea, you can read people, saying, hey, things are generally going to be okay. There, but these other western markets you know you're reading as well as I am and we're all in sort of who knows let's see what happens mode.

Got it and then.

In regards to gross margins I know you I I appreciate that you.

<unk> withdrawn guidance, but I know the original thought was that was something that could potentially trough in the first half from this year and then start to rebound into the next have some <unk>. The next half of this year. So it's open you can give some anecdotal comments on different gross margin improvement initiatives and how old there.

How it has been impacted my C. 19 in regards to time.

Well I could I can just as J.J. I can tell you sort of maybe just sequential story a little bit maybe that'll help you. Obviously, we're not Kevin guidance going forward, maybe I can give a little corner. There also so sequentially were up one for sense. You know, we do price increases typically at the beginning of the year So fast.

And to the extent that you have lower sales in geography is with comparatively lower margins like a China still going to have tailwind peer margin. So I'm trying to sequentially I think we were down $350000 or something like that but it helped the marks in half a percent or more we had a really strong restore flow.

Thank you want it so that Conversely, hurts a margin comparatively lower margins, there, but more resourceful sales that'd be a million dollars. So more sequentially think maybe that's a little bit but in that range until you know mix is a big part in the story and it goes to your first question of you.

You know, what what's going to change first and what's going to recover first and that's really just tough tough to say at a higher level. Maybe I would say is volume goes down you know maybe have a certain blast variable or direct labor hours to advertise those sticks costs. So that's probably a little bit of a headway headwinds.

Generically speaking directional like but again that mixed case is certainly a pretty important part of the story.

Got it alright. Thank you that's only on.

Thank you.

And our next question comes from the line, but Mike Ptovsky with Barrington Research Your line isn't open.

Good evening I could could you could you give interim Q1 sort of <unk> you called out biologic patches allographs than Velvet towns could do to say sort of.

Growth rates of those respectively.

So like valve, you'll charms where 11%.

And.

When we look for patches bovine patches were about 3%.

And what was the third one you want it <unk> Allograph allographs.

Allographs about 55% really nice answering the allografts you want.

Excellent alright so.

George Let me, let me ask you this.

Work, New Jersey, Massachusetts, all heavily.

Actually the top three states in terms of impact you have any sense just offhand you know what what percentage of your U.S. revenues come out of those three states.

Boy, that's a great question I don't have that with me right now.

Alright, and then I guess it'd be <unk>.

Sorry about that.

So I <unk> I guess then in terms of the costs caught I may have missed this but did you guys speak it all about r. and D. anything you're doing differently.

As you move forward.

No, but if if you're relating it to yeah, if you're waiting to the costs cut there's an angle on that question in the corridor oddly R. and D. was 10 per cent of revenue. So it's a high water mark for us, but maybe it's worth and everything exactly asked this question, we maybe it's worth taking into that a lot of it is the M.D.

They are process over in Europe is extremely expensive and the transferring of these factories that we've been doing for the last two years, which are a lot of them as we talked about as Jim was asking at the beginning phone call I started coming to a head right now so there's a lot of transference cost and I would say that sorta two thirds of that 10%.

Those two buckets, so lots of money to R. and D. not so much at what you'd think of as classic medical device research and development R. and D.

Okay are you guys going to try to make as you move forward that we're going to try to make any adjustments there or.

And the G.N.A. and sales and marketing.

And you mean adjustments downwards or or more of any more.

<unk>, Yeah, I guess, some companies that I've I've listened to so far this quarter of talked about streamlining maybe eliminating lower potential problem projects that sort of thing. How are you guys doing anything along those lines are now.

Well you know a couple of the projects fell out when we made acquisitions in the same segment and so a couple xena sure related products that we were going to do like finish or 2.0, we didn't need to do but no not really I mean, I will say the the the layoffs at the energy Department like they had all departments.

I don't know for 12 engineers were let go so it's it's not like we have a lot of fire power now I do feel like.

We're in a whole different places in terms of were circling the wagons, we're trying to figure out what this all means and we're trying to rebuild a profitable Anthony <unk> you know in the wake up all this and see what happens then and I think the R. and D. The the the creativity R. and D. Department, probably goes down in the short run, but you know.

Medical device company, you got to have an r. and d. effort or something.

Absolutely Yeah, I guess also.

On the on on the dividend I mean is that sort of a sacred cow that you really don't want to look out at this point or is there is a room to sort of.

Look at that as you move forward.

I mean, I think you always have to be evaluating that I I would say, it's it's an action that I hope you all look out and you go Oh, well listen to People's actions not their words and it's an action that says hey, we feel good about where the company is we felt great about the cash position and not even add to that we felt great.

About haven't $41 million worth of inventory a lot of it which is finished goods, which will turn into cash quickly. So when we first got into this a month ago. You know you're we all experienced the different range of emotions around the Kobe thing and it was Oh My God. Some day and then somebody it was like Oh, it's gonna be Okay. I think you start looking around going what about the cash.

And so we feel really good about the cash and I think that decision by the board was made only two days ago. So the so the board had all these facts in front of them and they still said, hey, let's let $1.9 million a cash out the door in the form of a dividend.

Okay.

And then I guess last question for me.

I I'm, assuming that you guys already in touch with some of your key key docks I mean in some some of these states are making.

You know movement towards opening up for you know of quote unquote elective surgeries in such I mean, what.

<unk> is there anything that you can speak to in terms of of.

Oh conversations you had along those lines.

Thanks.

Yeah, I'm, Mike It's Dave It's a good question I do believe that <unk> I spoke with several dogs, a few weeks ago and what was the parent was that the cope with pandemic was hitting different parts of the country at different times and so again. This is a few weeks.

But there were some cities in the Midwest, which were still do elective surgery and then there were plenty of places like New York City or.

And where it wasn't taking place so it it's very regionalized and even you know down to specific city what's happening.

You know we've already talked about the types of <unk>. Some products continue to be use that or you know in more emergency situations like embolectomy path that or.

So even or Allograph.

Whereas other products you know the procedures, maybe getting differed in regions, where cold, but it's more prevalent like try that for example, so it's it's it's a sort of a patchwork all around the country and around the world and that's what we're finding.

Gotcha alright, thanks, so much guys really appreciate it.

Thank you might.

Thank you.

Not shown any further questions on the phone in mind, so ladies and gentlemen that concludes today's question in there that concludes today's conference I will now like to thank you for your participation you may or disconnect.

Great day.

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