Q4 2021 LeMaitre Vascular Inc Earnings Call

[music].

Welcome to the La vascular Q4, 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. J J Pellegrino Chief Financial Officer of Lemaitre vascular. Please go ahead Sir.

Thank you Vanessa.

Afternoon, and thank you for joining us on our Q4 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.

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

Forward looking statements are based on our estimates and assumptions as of today February 24, 2022, and should not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the cautionary statement regarding forward looking information and the risk factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that could cause results to differ materially from those expressed or implied.

During this call we will discuss non-GAAP financial measures, which include EBITDA and organic sales growth.

A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and in the.

Available on the Investor Relations section of our website Www Dot one dot com.

I'll now turn the call over to George Lemaitre.

Thanks JJ.

On today's call I'll cover three topics.

Q4 sales.

The impact of Omnicom.

And finally, our continued head count growth, including sales reps and production personnel.

Sales were up 5% to $39 5 million in Q4.

Sales grew 8% in the Americas, and 1% in Europe , while APAC was down 3%.

Arctic graft and Xena sure led Q4 sales growth.

<unk> sales were up 16% year over year to $6 4 million and we posted record xena share sales.

We believe omicron and associated staffing shortages decreased sales in Q4 as hospitals deferred elective surgeries.

At about 10% of our 450 employees contracted the virus in the last three months.

As a result, we implemented additional safety measures, including work from home free rapid test free N 95, masks and $100 booster bonuses.

So for a second straight year, our January sales kickoff meetings, where virtual.

About 95% of our employees are fully vaccine and we will soon offer on campus booster clinics.

We're currently at a high watermark of 498 employees with most of the increases coming in sales and production.

We have 107 reps on payroll today and will likely be adding another 10 in each one.

In manufacturing, we continue to hire as we recommit to know back orders and combat any potential supply chain issues.

Today is 177 direct labor employees is also a high watermark.

Internationally, we continue to grow our sales footprint in our facilities with.

With the recent hiring of a Korean country manager, we expect to open our Seoul office in Q2.

This will enable us to sell <unk> in Korea in 2022, and most other products to follow in 2023.

Korea will join Japan, China, Australia, New Zealand, Singapore, and Malaysia, as our seventh direct market in APAC.

Korea was our second largest distribution market in 2021.

In 2021, we also expanded our warehouse and office facilities in Japan, Italy, and England to ensure adequate product supply and timely delivery.

Notably, we install the cryo freeze or in our Hereford, England facility and in Q1 received U K tissue bank approval for our allografts.

The UK will be our third country with an allograft approval, joining the U S and Canada.

Deliveries to UK hospitals should begin soon.

Despite increased head count and omicron challenges, we posted a 21% Q4 op margin and ended the year with $70 million of cash.

We also increased our dividend for the 11th straight year.

The scoring we made focus on profitability and cash generation.

As you've seen we like to use this cash for acquisitions dividends and distributor buyouts.

Now I'll turn the call over to JJ.

Thanks, George before I discuss the quarter I will say a few words about last year.

Sales in 2021 were $154 $4 million up 19% versus 2020.

The Americas grew 26% Europe , 8% and APAC, 15%.

Increases were driven by a full year of autograph revenues as well as increased valvulotome and xena share sales.

On the bottom line operating income and net income both grew by 27% in 2021.

Sales growth outpaced operating expense growth.

We also completed a number of important initiatives in 2021, including restoration of our CE marks.

Progress on our various production transfers high.

Tiring 23 sales reps.

Product offerings simplifications.

Increasing the size of our manufacturing team.

And the completion of a secondary stock offering.

With regard to our Q4 2021 results our gross margin in the period was 65, 7% a 70 basis point increase over Q4 2020.

The increase was driven by average selling price increases and favorable sales mix as well as Artur graph purchase accounting charges in Q4 2020.

Q4, operating income was $8 $3 million, a decrease of 13% versus Q4 2020.

The decrease was driven by increased operating expenses.

We continue to reinvest in sales reps.

And increase our regulatory spend particularly.

Particularly as Europe transitions to the new MTR CE Mark.

In order to reduce our manufacturing labor and overhead rates and therefore improve gross margin.

A recently hired about 45 direct labor employees.

As we evaluate our gross margin on an annual basis.

It is important to note that in 2021, we incurred significant costs rationalizing our product portfolio.

In fact, we reduced our skus by 18% in the year and began shutting down for small and underperforming product lines.

These product lines terminations contributed to the outsized inventory write offs of $3 $8 million in 2021.

Additionally, manufacturing overtime and increased Zaniest your freight cost reduced the gross margin in 2021.

And these two issues should abate in the coming quarters.

We ended Q4, 2021, with no debt and $70 million of cash and investments too.

$2 $9 million cash increase versus Q3 2021.

Driven by $10 6 million in Q4, EBITDA and <unk>.

One $7 million from stock option exercises.

After completing the payoff of both our term loan and revolver last summer.

In November on November 30, we canceled our lending agreements.

This eliminated annual charges of approximately $215000, but have resulted in a one time below the line noncash charge of $495000 in Q4 2021.

We'd like to thank our partners at Keybanc was $65 million loan to us during the initial COVID-19 crisis facilitated the autograph acquisition.

Turning to guidance, we expect Q1 2022 sales of $37 7 million to $39 7 million.

Which represents an increase of 8% at the midpoint versus Q1, 2021 and 10% organically.

We also expect operating income of $7 1 million to $8 $4 million, which.

A decrease of 3% at the midpoint.

Our Q1 2022 EPS guidance of 26, a share to <unk> 30 per share implies a midpoint of 28 per share.

EPS in the year earlier quarter was also 28 per share.

For the full year 2022, we expect sales of $162 million to a $166 million, which.

That's an increase of 6% at the midpoint versus 2021 and 8% organically.

We also expect operating income of $38 5 million to $41 1 million, which represents an increase of 9% at the midpoint.

Our 2022 EPS guidance of $1 35 to $1 45 per share.

Presents an increase of 12% at the midpoint.

With that I'll turn it back over to Vanessa for questions.

Thank you we will now begin our question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key and if youre using a speakerphone. Please pick up the handset first before pressing the numbers once again with your.

Jen please enter the queue by pressing Star then one please standby, while we allow parties to queue up.

Vanessa George do you think we should let someone ask a question out there it seems like there's a queue.

Sure.

Is that is it time for a question that we're trying to do here. It looks like we have our first question from Brooks O'neil with Lake Street.

Good afternoon guys.

I have a couple of questions and I appreciate the opportunity to ask so first youll.

You probably read in some of my notes that I referred to subdivide call made playbook.

Given all the uncertainties and challenges in the World would you anticipate any fundamental changes.

Your execution against the playbook going forward.

Brooks first of all nice to talk to you again, it's George.

Short answer to your question no I don't think we're going to change our playbook.

Great.

Secondly, I'm curious I think David told me that you guys took another price increase an autograft earlier either late late in 2021 or earlier this year could.

Could you comment on.

And the reaction in the marketplace to that price increase.

Sure. It was an 11% price increase in January and the reaction seems to have been just fine. It was a smaller increase than the year before Brooks when it was 25%.

Yes.

Okay and then one last question that I appreciate the opportunity again.

I noticed I think you guys announced the $20 million share repurchase program. After the close and I'm curious as you and David.

Our board look out at the acquisition environment versus the opportunity by your stack would you say you have a particular preference for one or the other or will you just continue to be fairly opportunistic to try to drive the highest ROIC you can generate.

Brooks, it's Dave Good question, we're always looking to drive ROIC see I would say I mean as you know spearhead acquisition. So we're always on the hunt looking for good acquisitions and when we find them at the right price, we will execute but in the meantime, it's basically good housekeeping good.

Governments to have a share repurchase program authorized and as the company gets bigger we found it appropriate to slightly increase the size of the authorization.

Makes sense. Thanks, a lot again keep up all the great work.

Thanks Brooks.

We have our next question from Scott Henry with Roth capital.

Thank you and good afternoon, just a couple of questions.

First could you break out biologics first nine first non biologics in the quarter.

Sure Biologic Scott, it's Dave here were 48% of sales and they were up 10%.

Great.

And then.

Could you comment on valvular tell them how they were.

Were in the quarter.

Sure. Scott. This is George <unk> had a good quarter, we had three big growers in the quarter autograph valve Thompson Zeno.

<unk> for what the percentage growth was but I know it was one of the top three growers will get back to you during the call if we find that okay.

Okay I appreciate that a final question.

Lending levels were a little higher in the quarter I think the trend would.

Would you should we think about that as a continuing.

Trend line or do you think spending might kind of pull off a little bit.

Thanks, Scott This is J J.

It's a good question, yes, a little higher than trend you know we're hiring.

Sales reps.

And we're hiring folks and other areas of the business as well sort of that bounce back and rebuild from the from the COVID-19 topics over the last year and a half or so and we'll continue to do that but there is a seasonal piece of.

Sort of Q4, and Q1 as well so you might expect to see sort of.

Our higher levels around Q4, and Q1, and then sort of tapers off as the as the quarters move on so.

I would say, yes, that's the trend that we've sort of outlined for you guys.

But cost containment has been a hallmark of the company over time, and we'll keep a close eye on op expenses as we move throughout the year.

Okay, maybe if I could just follow up specifically.

On the R&D side, which seem to be a little more of an outlier. In Q4 is that just some kind of noise. As you mentioned seasonality, we're going to see higher and lower quarters or is there anything going on focus on R&D or a specific trial.

That should we be thinking about.

Scott I think well I think what you're seeing inside that number is the continued exceptional expenses around our CE marks so the MD DCE marks that we were trying to get all of 2021, and we succeeded and now kicking in as the MD, our CE marks, which I would call sort of the varsity level CE.

<unk> that you need to get by 2024, and the spending has begun there it was a particularly expensive quarter on that stuff not necessarily repeated every single quarter going forward, but a lot of the R&D money these days going towards European regulatory.

Okay, great. Thank you for taking the questions.

Thanks, a lot Scott.

Thank you once again, if you have a question. Please enter the queue by pressing Star then one and we have our next question from Zachary <unk> with Jefferies.

Hey, guys. Thanks for taking the question.

A couple for me first on Rex.

Can you give some color on expected productivity per rep.

And how long it will take.

Yes, I think you mentioned 10 coming into the first half hour.

Then we get to see are those reps.

Seasoned reps or are they relatively new and then I've got a couple of follow ups as well.

Okay. So lots of questions in there.

I would say we always get asked that question, we always give a unsatisfactory answer Zach and maybe this is George Zach sorry.

Maybe it feels like if you get a great wrap theyre up and running in three months and some reps never really get going and so maybe if I could call out a number like six to nine months that feels okay to me.

I don't last forever, the turnover rate is something like 16% and that would indicate there sort of three.

Three or five year folks so you got to get them up and running pretty quickly to make it work for the company.

And then the model that you are talking about when we're looking to put quotas on each of these reps I will give you. The U S model I think we are asking for roughly and it changes every year, but we are asking for something like $90000 to $120000. In GP addition, in the year following.

In everyone's plan every single year, so something like that would be the model youre trying to get them to grow business by that much GP every year.

And then any color on.

Getting back to that high watermark.

In terms of wrapped up within the company I think if my memory is correct is the high watermark pre Covid was I think 130, maybe 40%.

Any color there.

Okay. So apologies for correcting you, but it's actually 112 for 114 is our high watermark, So were right there and I hope.

At least two times. So now when we talk to you we'll be past the high watermark, but if not the next time, we'll talk to you will be at the high watermark.

Understood I appreciate the correction.

Thank you just to M&A I know one.

One of the previous questions is there any area of the business.

Look to pull through more with M&A with our debt.

The success is.

The biologic space.

Focus of the company.

Yes. This is Dave it's a good question.

Obviously, the biologics portfolio that we have acquired has done quite well for us.

So we certainly continue to look there I would say at a higher level, we're hunting in the open vascular surgery and dialysis access space, that's sort of the main hunting ground for us, but we've started to expand a little bit looking at some adjacent markets for <unk>.

Sample of cardiac surgery, and we've looked at some biologic products. There also so I think the theme is open surgery.

Houston hospitals, and preferably niche low rivalry in markets.

With revenue yet.

Aggregates need to have I would say $10 million of revenue or so or more would be ideal.

Okay. That's helpful and then if I could just sneak one last one in here.

Yes.

The Rep access has been.

Point of contention.

The height of Covid and then as.

You've gotten more active I guess can you just give a little insight on rep access.

Portion of <unk>, and then how things are going through the first couple of weeks here in the first quarter 2022. Thank you for taking would suggest we would appreciate it.

Zack that's a great question I'm sure. It's something that's on a lot of People's minds, maybe I answer it in a slightly different manner, rather than using the word rep access maybe it's just procedure volumes and feelings in hospitals and I think what we get what Dave and JJ and I get from our sales reps at our at our Friday sales calls is that the last week.

December and then the full month of January was the tough sledding spot and it was driven of course by omicron, but was even more driven by staffing shortages in hospitals. Those two things conspired elective surgeries to go down for roughly that five week period, and then I'm sure.

You're hearing this from other companies as well, but I'm happy to report that it seems very much so and we're 70, we're 60% USA our revenues and it seems very much like at least in the U S. Things are very much opening up again.

In terms of February the full month of February kind of feels like a normal month and I don't know how you don't know where omicron grows or I don't know where the rest of the crisis goes but it feels very open right now.

Helpful. Thanks for taking my questions guys I appreciate it.

Thank you.

And we have our next question from Javier <unk> with Spartan capital.

Hi, Thanks for taking my call and good to speak with you again.

A quick question on just give more color as far as the sales force. So as previously mentioned on this call and in the previous earnings call of the high Watermark of 112 reps. My question is for the end of the year 2022, what is management's expectation for the number of sales reps or can you provide any more clarity.

As you know.

How much you want how many more people you want to add to your sales force by the end of that year of this year sure Javier. Thanks, a lot again to hear your voice and I'm glad you launched on this thing exciting to have you on these calls its George.

It feels like we're at a 107 right. This moment it feels like the company is trying to land between something like $1 15, and $1 20 or something like that it is hard though again. There is there is turnover in the sales forces. So it's not always something thats at my desk to decide on a lot of people.

Just decided to leave at certain time, so I would say.

Short answer to your question $1 15, $1 20, something like that.

Okay and do you have any specific.

How would you say you like.

Drivers or our plans to get to that number.

Very much so yes, we mentioned on the call today that we think another 10 will get hired in each one so you could add 107, plus 10 and get to 117 also sort of breaking that down we have four reps that are signed right now that don't work here yet so thats 111, and then we have 10 more requisite.

<unk> is out there with a rep hasn't signed they are coming on so.

It's it's happening and we're very well, particularly in the U S. I'd say, we've been very aggressive about we rebuilt out to 62 territories. This year in our USA plan and where we're chasing that we're trying to make that happen we have to watch our nickels and dimes here as well we try to have a profit around here.

But that's been one of the focus areas of the company is to build back the salesforce.

Awesome. Thank you so much.

Thanks, a lot how are you.

And thank you on standby for further questions.

Okay.

Yeah.

And that concludes our question and answer session.

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.

[music].

Thank you.

Yes.

Okay.

Okay.

Okay.

Yes.

<unk>.

Okay.

Yes.

[music].

Yes.

Yes.

Okay.

No.

[music].

[music].

[music].