Q3 2020 LeMaitre Vascular Inc Earnings Call
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Okay.
Welcome to the Lemaitre vascular Q3, 2020, <unk> financial results Conference call. As a reminder, today's call is being recorded at this.
This time I would like to turn the call over to Mr. JJ Pellegrino Chief Financial Officer also meet basketball. Please go ahead Sir.
Thanks, Lori and.
Good afternoon, and thank you for joining us on our Q3 20 Twond the conference call.
On today's call are chairman and CEO, George Lemonade, and our President Dave Roberts.
Again, 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 are subject to risks and uncertainties.
Possible, we will try to watch identify those forward looking statements by using words such as believe.
Yeah, just the papers to forecast and similar expressions are forward looking statements are based on our estimates and assumptions as of today October 29th 2020, 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 but are not yet outstanding debt.
Reconciliation of GAAP to non-GAAP measures discussed in this call is constrained and associated press release and is available in the Investor Relations section of our website Www Dot <unk> dot com.
I'll now turn the call over to George Let me.
Thanks JJ.
On today's call I'll review cope its impact on our company as well as Q3 sales and profits.
In light of the recent escalation of Cobiz, we must redouble, our commitment to the health and safety of our employees.
We now know of 12 employees, who contracted the virus kind of recovered and we await word on the most recent cases.
In addition to requiring masks and temperature checks in September we provided just in sensing watches to all Burlington employees.
Watches beep when employees or six feet apart.
Having this information for future contact tracing.
In Q4, we'll expand this watch program two or three other production facilities and our European headquarters.
Due to these safety measures, we're currently experiencing no manufacturing or logistical issues due to the virus.
95% about production personnel have remained on campus throughout and approximately 50% of our administrative personnel have returned.
Well elective surgeries to be covered for now the job description of a sales rep has changed in the time of Corona.
Access to hospitals and surgeons offices has been restricted.
Visits often required to advance deployment or invitation and inherent other safety measures like temperature checks.
Like all of US sales reps have leveraged available email and video technology, but there are limits to this.
And with another covered weighed upon us we expect rep access to can you continue to be challenged.
As to our financial results, we posted sales of $36.4 million in the quarter up 25% versus Q3 2019.
Geographically sales were up 37% in the Americas, 12% in Asia Pac and 6% in Europe.
The three recent acquisitions Mardi Gras cardio sell an easy sites.
And the return of elective surgery drove growth in Q3.
These record sales combined with head count reductions produced strong bottom line results.
Generated $10 million of op income in Q3.
EBITDA of 12.6 million and U.P.S. 37 cents a share.
With that I'll turn the call over to JJ.
Thanks, George gross margin in Q3 was 62.3% down from 69.3% in Q3 2019.
The decrease was driven largely by autograph purchase price accounting as well as manufacturing efficiencies.
We do expect to rebound to 65.5% in Q4 as Arthur graft accounting normalizes.
Operating expenses in Q3 were $12.7 million down 11% versus Q3, 20, Nike but.
The decrease was driven by reduced selling and marketing expenses down 31% year over year.
Fewer reps fewer trade shows and that's traveled drove the decline.
Manufacturing transfer across all sold yourself as the factory integrations of omni close Syntel for completed in Q2.
Operating expenses also family.
$470000 need on the sale of our recently closed Omniflow manufacturing facility in Australia.
It seems like Q3 as an operating expense a low watermark guidance reflects this.
[laughter] leveraged covenant related salary reductions on September 1st and we are cautiously hiring more sales reps.
The newly acquired Arctic graft product line is performing above expectations and generated $5.4 million in Q3 revenue and $950000 of operating income.
Our Q4 guidance includes our graph sales of $5.6 million and then EPS contribution of five cents per share.
We ended Q3, 2020 or $34.4 million, an increase of $9.3 million versus Q2 20 twond.
The increase was driven by $14.1 million cash from operations.
$2 million from sale of Australian building and $1.2 million of stock option exercises.
This strong cash generation enabled us to repay $4.5 million of Robert Brown acquisition debt.
We ended the quarter with debt balance of $60.5 million.
You may recall that we experienced CE mark issues with some of our devices recently, including Dacron Grafton bovine patches.
We are pleased to report that in Q3, we recently received temporary authorizations, allowing us to sell the Grafton patches.
<unk> Q4, 2020, well you're communist countries.
Any impact related to this issue is included in our Q4 guidance.
At the midpoint, our Q4 sales guidance represents an increase of 19% versus Q4 2019, and our Q4 operating income guidance represents an increase of 70%.
At the midpoint, our Q4 EPS guidance of 30 cents per share.
That's an increase of 32%.
With that I'll turn it back over to worry for any questions.
Ladies and gentlemen, if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone.
My question has been answered I do wish to remove yourself from that can you. Please press the pound key.
If you have a question for HM.
Oh from Lake Street Capital Your line is open.
Hey, Good afternoon, guys you have Frank talk the noncore Brooks. This evening. Thanks for taking my questions. Just a couple for you here today.
Hoping you could she's old exactly does the bottom end and top end of organic growth assumption I heard your car.
Comment of 5.6 million expected from autograft, but I'm, just hoping you could help us.
Have perfect clarity into kind of what you're thinking it from an organic growth perspective for Q4.
Sorry, I was on mute there talking to myself, yet so no problem.
Yes. So for Q4, I think we think the organic growth is going to be sort of a low single digit negative numbers, maybe 2% or so something like that so you know in.
True, but from where we've been.
But not quite yet positive numbers and I think that the full 19% growth is driven by the autograph.
Cardio, so acquisitions and FX actually helps.
I'm a bit year over year in Q4, as well by about 1.7%.
Got it and then on the second question.
For gross margin you guys have done a remarkable job of integrating our acquisitions and getting back to your corporate average in the high Sixtys looks like you're well on your way with your guidance there for Q4, but just hoping if you could provide us with a little more granular update on where you're at in the process with integrating part of graphs and getting your.
Corporate margins back to where they have historically been for the fourth quarter as well as anything anecdotally you can talk to look into 2021.
Yeah. So it's a great question. Thanks, So you know.
The Arta graft a inventory step up piece goes away, probably halfway through Q4, and so if arter graph cost us four and a half or almost five percentage and gross margin headwinds.
Headwinds for this quarter, you know, maybe you get half of that back or so and in Q in Q4 and that fully back after that so that'll be a nice improvement for where we are in order.
Lifting the freeze of hiring for sales reps heading into the back part of the year, but.
But just kind of your thoughts on how we should be thinking about.
Eliminate adding sales reps I think you added some from the autograft acquisition.
And maybe how how your guidance contemplates.
Those ads in your in your operating income.
So.
Drew this is George maybe I'll take that maybe it's a little bit more in my corner here. So yes.
Yes, we have started hiring.
This is new to US we have about 12 requisitions up on the board right now, we'll see where we go.
So we were watching closely what's going on in Europe for co bid right now and also in the United States for co bid right. Now you just get started hiring and then something changes. So it is a tough environment to predict where you're going to be in three months. It feels like the last call July 2020, Threerd was a million miles from now but maybe.
As a as a band I'd say, we'd be up by five or 10 sales reps by the end of the year.
Okay and could you sorry, if I missed this too but did you give rep headcount as of the third quarter.
Yeah. It was 79.
Oh.
Got it.
And could.
Could you be a little bit more precise in terms of geography.
Sure of course 35 in North America 33 in Europe, and 11 11 in Asia Pac.
Got it.
And then just kind of looking at a limited over the past four or five years.
Sales Rep productivity has held fairly stable.
Kind of as you look into 2021, I mean, how should investors think about.
The mates growth going forward in context of Rep productivity.
Now that the sales forces is roughly 20% smaller than where you were at the beginning of the year.
And the reps you're hiring now we'll need some time to be productive for to get to productivity levels.
Right I think the whole question of Rep productivity is the the heart and soul of this whole thing for our company right now.
How much can they get done right now it's it's a big question I don't think we have answers on it at lemaitre vascular because everything's changed for the rep. They have a very difficult time getting into hospitals ad hoc and into the Doctor's office offices. So I honestly think that so far away that I couldn't even put numbers on productivity.
Yeah, I would say.
We feel somewhat fortunate to have gone through the last six months.
When sort of employee light.
Because were nervous reps aren't able to make as much of an impact as they used to and I'm working on a hypothesis that brand switching in a time, where reps can't really get into hospitals.
Then reduced it feels like people are going back to their to their safety zones and just using the products. We've always used and I think you see that in our Q3 revenues.
Got it and then just to be to be selfish. One last question just on the procedure and environment in general obviously, there's some some spikes in cases.
Throughout the world.
Just could you talk about what you're seeing so far maybe in your and your October trends.
And how that might correlate to your to your Fourq guidance range.
I think the last part of your questions instructive, what we saw in the first four weeks of October has has produced our guidance and looking at what happened the summer quarter, and then for three or four weeks, but we don't you know I wouldn't go off and talk about them I think there was enough to talk about here about just the quarter that's close right.
I've been digging into October.
Got it thanks for taking the questions.
Thanks, a lot drew.
Thank you next question is from Mike Mike.
Might be tough killed Farmington research your line is open.
Hey, good evening, guys. So George I guess I want to ask you sort of have a bigger question. You know a lot of companies are starting to sort of share what they learned during the past six seven months of sort of.
A new normal or trying to adjust to whatever we're calling this a on normal times.
Talk about you know what you feel like you learn during this time in terms of your business and you know I mean for for were up roughly three years you guys kind of had flat earnings that now we are in the most challenging of times.
You know you're going to sort of break out of that.
That and most likely show to know some really nice bottom line growth as talked about what you guys have learned and.
And how that all sort of inform the future. Thanks.
Sure and it may be a surprise or it might not even be about co, but I think what we learned.
About the autograft acquisition and the use of debt and going large.
So I think that's been some of the biggest stuff that we've gotten JJ, Dave and I have sort of digest. It for the year is that we need to go a little bit bigger with the acquisitions and I think we're a little bit more comfortable now using some other forms of capital I think in the past we've had a very conservative balance sheet. So maybe that's one of my big lessons for the first nine months, if you're asking so.
Typically about Cove, it I would say the world from the the company's breaking down into two segments right now its DUS sales reps and managers and then everything else and I would say on a positive note.
It feels to me like in Burlington here now you know I hope there is not going to be some kind of cobot outbreak here, but it feels to me like the game is back on in terms of making medical devices assuring their quality, having high levels of production inventory things like that and so like all of US on this call would probably.
Finding some workarounds, where we can kind of go do that thing, but we can feel safe about doing that thing and I feel like in the five buildings in Burlington and our extend this to the other factories at Lemaitre vascular we're getting about we're doing our stuff will wear on these watches no one's bumping into each other and so far knock on wood we have.
But any spread inside of the buildings that are let me ask I think there's about eight production buildings around the world that eliminate vascular and we havent had any spread so I think.
The Big thing I've learned is you know in a first the first month that was really scared of even going into the building and I think now we're not many of us are coming back to the buildings, we figured out how to get around.
But then as I answered drew on the sales force there is something very different about the sales reps they need to go out and get into other People's building.
And I know that in our building in Burlington are five billing theres a sign on the door. This is document unless you're one of these 37 people that work here and that's sort of where the hospitals are going with this unless you're very specifically asked into their hospital. They don't want to see you. So I would say the broad you know 75% of our employees the game's onward.
Doing stuff, it's getting back to work around normal if you will but with the reps, it's a lot harder and more difficult and I think I've answered that question two different ways. So hopefully you got something out of my lesson.
Absolutely just one kind of quick follow up on that subject. So when you think about just on the on the sales side I think at one time you guys may have been like 110, 115 wraps or 112 or some number like that can you envision even two years from now being back at that number or or or do you think that.
Sort of what Youve, possibly learned on that side of things as maybe you don't need that that level of salesforce.
Well remember we're dealing in so many if then statements right now and so if theres a vaccine coming out in February and someone is going to be sticking my right shoulder with a vaccine definitely that will be back there, but if you say, it's not going to work and things are going to drift I would say well, we'll feel our way towards that you probably hear from us every three months.
I think the bias right now is we're a little bit light at 79, and you're you're quoting a correct number high watermark a year ago was 112, and so I would say the biased inside these buildings is we're a little light, which is why so that 79 were sort of we've got 12 acquisitions out there and I would say the band is we're trying to add five.
Five to 10, right now who knows some of these guys quit on US remember its not all like we went off and took them all out we lost eight or nine reps during the summer one thing that we found reps do during when they can't leave their houses they start job hunting. So we lost some reps to wasn't all something that we wanted to do.
Okay. Okay, Great and then just a quick one I guess for JJ and I may have missed this at the at the outset, but did you you guys talk about a sort of a topline drivers in terms of like the big Big product categories. All the tones in the shore allografts.
Performance then.
Maybe touched on it you want to you you're thinking year over year or your sequential yeah your year over year over year because.
Yeah. So so I mean year over year I would say.
The Arctic graph piece is certainly an important part of the equation bovine.
Well buying graphs are up.
5.3 million or something like that year over year, driven by by the acquisition.
And then the cardio still acquisition actually helped a lot year over year as well reported.
And by maybe a million eight something like that so that's probably number two driver and then valvulotomes were up pretty sharply as well year over year driven by the high growth, but also the easy site and price increases related to the easy site. So it's been a nice another nice acquisition story really so those three acquisition pieces.
I'm really helping drive reported sales year over year.
What about Valvulotomes X. easy easy and ER and then you know.
I think they were up decently I can't remember what the percent maybe what do you guys and I, but I feel like it was still in place and are the face value of the total business.
Single digit, 7%, 8% something like that.
I think it was more Jay I think we had a really nice experience I don't know the exact number I think were really nice experience, particularly in Europe with the the the late valve itself.
Belvita Tom units worldwide were up 9%.
Yes.
Yeah.
Is that a question in there sorry, we couldn't hear yeah, no I'm, sorry, I may have missed it but did you give as you know Jennifer a year over year.
Yeah sure. Yeah go ahead good day.
It like it was flat reported year over year organic was down 2%.
And there was a little bit the down 2% was a little bit affected by a backlog in Europe related to some of those same topics.
Okay, and then just last quick one any update on Xenosure trial in China. Thanks.
Yeah update on the trials are a little bit of progress a little bit of better news on that trial.
Because china's cleaned out their coal that problem.
A follow up which was getting lost the patients are being lost to follow up in Q1 in Q2. The patients are now comfortable coming back to the hospital and as a result, the cardiac trial now needs no more enrollees and is effectively done enrolling and to give you a high level look at this I would say the cardiac.
Side, we're thinking about an approval in 2023, we don't see road blocks on the way there. So the vascular side, which is a different side of the trial.
We also have been happily surprised with the follow up is starting to occur and we do have a road block we have a 85% chance that we'll be able to work our way around the roadblock. There's a question about about the endpoint and about the re doing of the endpoints. So we'd say, 85% chance, yes in 2024 infill.
18% chance no we will not be allowed to redo our endpoints for the Chinese FDA.
Okay, great. Thank you.
Thanks, a lot thanks bye.
Your next question is from chain Sidoti of Sidoti and company. Your line is open.
Hi, Good afternoon can you hear me.
Yes Sanjay.
All right. So just to be clear I think you said the autograph added about 5.4 million in revenue, but the total acquisition revenue with growth great no that sound about right.
Yeah, you're in the ballpark total acquisition revenue about 7.6.
Okay, and then you know if you take the 5.4 you did this quarter and then you did a couple million in the queue.
June quarter, you're looking about 5.6, I think you said for.
Our December so it sounds like they're getting the autograph going ahead, you know 13 million issue.
A little less than that little more than 11.
Okay. So it's 5.42 days ago, Yeah, there's a couple of hundred in Q2, the little stub period and then okay.
Five six yeah, but but if I if I look at the you operating income it generated this quarter versus the interest expense. It sounds like it was accretive even in this quarter with the.
Do you actually have to good sold yeah. That's a good story, Jim it's on an op income basis. It added almost a million Bucks when you got done with taxes and interest expense it was accretive to a penny a share.
So I guess, Dave can put this one in the win column right away.
He's already got it [laughter] not quite but early days.
Hi, Dan.
Can you comment at all about the trends you know July August September did did it get better every month in the quarter.
I can give you those numbers im happy to organically down 7% in July.
Flat in August and up 1% in September.
Okay.
All right and then the guidance for Q4, Yeah, I'm impressed you've given guidance at all with the with the current situation, but 34 to 38 million is the difference between the turning point 38, what happens with cold winter or other factors in there.
Yeah there is.
There's definitely a covert topic and there Jim and you know.
Well, we were thinking about guidance. We were we were like Okay. Do we just sort of status quo, where do we assume a second wave or do we assume things get better and I would say, we probably Eric and I'll just more on the conservative side, but we'll see and you know you don't you don't know, how that's going to turn out.
And then there's a little bit of a CE mark issue in there to try to figure that out and then there is a seasonality piece in there usually Q4 is better than Q3, but Atlas. This odd year I think we feel like some of the Q2 sales got pushed into Q3. So there was sort of a nice answer and nicer answering Q3, maybe the seasonality with the cash.
Maybe that means a little lighter seasonally speaking from Q3 to Q4 current guide. So there was a lot a lot of puts and takes going back up for big numbers too.
In the guidance and we also talked about not giving guidance because of all that but I think at the end of the day. We felt like we'll just give you the best shot we've got what we'll try and figure out what we think it is to let you guys know.
Okay, all right and.
You bet and I tell my wife about that's a that's six foot watch thing is largely by those in a heartbeat.
[laughter].
Maybe just even needed [laughter] material.
All right. Thank you [laughter] thanks, Tim.
And your next question is from Scott Henry of Roth Capital. Your line is open.
Thank you and good afternoon, just a couple of questions. So I you may have hit on them already but my apologize Oh Jesus. So first could you give revenue in the quarter for biologic first non biologic just keep in the big categories.
I'm sure so Scott the biologics in the quarter were 40.
48% of revenue.
Okay perfect and.
Q3.
Upside relative to your expectations.
Where was that from.
Okay.
So we've got a lot of T. original good.
Right. It was a I think the guidance is 32.5, Scott, which is probably what you're getting at and we won covenant 36 36.4.
And so it was a big Delta I think if you think back to July 23rd again. It. So long ago that we were still coming out of a very scary place for the company. We Didnt know what the summer is going to look like and we figured we give some guidance, we'll give a big wide range one of the concrete things that did better than expected though.
As we've alluded to a couple of times in the call already but we got these what are called delegations in Europe for the CE, Mark which is each individual country allowed us to place our stuff on the market, even without CE marks and so we sort of did a save about 90% of the problem we had anticipate.
Going into the quarter with on that stuff and I don't know any and how much they want I'm getting it for us. It was all an awful lot. So things worked out a lot better on that front. The autograph I think was I don't know like 10% better than plan. It was like $400000 more than planned.
And so there's not a $400000 there and then honestly. It was it was just the cope with the doctors and the patients got back to it a lot more than we expected as of July 20, Threerd. We didn't know they were going to be rushing back to the hospitals and getting their work done I think that the fee.
Commendation of that of the the in a good way to Miss on the guidance.
Okay. That's that's good color. Thank you and then the final question Hi, when we think about organic growth I. It was negative in the quarter in how should we think about it going forward.
Recognizing that did I think there are two variables here of obviously the COVID-19, but also the lower sales and marketing as you know so if you had the same number of reps.
Do you think organic would be positive maybe I'm just trying to think about where we would get to a some sort of normalized organic growth rate.
I got to say I'm going to take the coated answer on this one Scott and I just feel like we are so in the middle or something we don't know about real quickly I, just went and I peruse like six or seven earnings statements from some of the big guys and some of the Guy next to us and it doesn't feel like anyone's producing.
Any growth right now with some very notable exceptions like penumbra. So I would say no one knows whether the organic growth is bad because the coated or whether it's bad because we'll make doesn't have 15 extra sales reps. So I think it's the answer is to deepen too complex to even get that.
Okay, well I appreciate you've given some color around the variables and and thank you for taking the question.
Thanks, a lot Scott.
Okay.
Ladies and gentlemen, and that concludes today's conference.
I would like to thank you for your participation you may now disconnect have a great captained.
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