Q1 2022 LeMaitre Vascular Inc Earnings Call
Welcome to the La Mede vascular Q1, 2022 financial results conference call.
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.
Good afternoon, and thank you for joining us on our Q1 2022 conference call with me on today's call are our chairman and CEO , George Lemaitre, and our President Dave Roberts before.
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 1095 reactors C 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 April 28, 2022, and should not be relied upon as representing our estimates or views on any subsequent date. Please.
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 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 Dot one dot com.
I'll now turn the call over to George for me.
Alright.
Thanks, JJ on today's call I'll cover four topics Q1 organic sales growth of 13% continued sales force growth to 112 reps.
Going direct in Korea, and the stronger U S dollar.
Sales were $39 6 million in Q1, a 13% organic increase versus the year ago quarter, all three regions posted double digit organic growth, the Americas, 12%, EMEA, 13% and APAC, 15%.
Due to Omicron February improvement the Q1 sales ramp with steep $10 7 million in January $13 million in February and a record $15 9 million in March.
Autograft and Xena share once again led growth in both posted record quarters.
Autograft was up 18% to $6 9 million in Q1 is that acquisition continues to outperform expectations Zane.
Xena share bounced in Europe , and Japanese sales growth continued.
Carotid shunts allografts and valve and <unk> also contributed to Q1 growth.
Notably we sold our first allograft in Europe is that product received U K approval in March. We've also begun the application process for German allograft approvals.
We built our sales force back to match, our pre Covid high watermark of 112 reps.
This 30% year over year Rep increase may have helped Q1, but we will certainly be a tailwind going forward.
And we're hiring reps in 2014 more cities, mostly in the U S and Europe .
We should have approximately 120 reps by December .
We're also growing our presence presence in Asia.
In April we agreed to buy out our Korean distributor for $540000 and we signed a five year office warehouse lease and Sol <unk>.
Last year, just saying bought $800000 worth of devices from Amit and sold them to Korean hospitals for approximately $1 $6 million.
We should be selling directly to Korean hospitals by January of next year.
In the last three quarters of 2022 sales of the Korean distributor should be slow and we anticipate approximately $300000 of operating expenses associated with our Seoul office.
The new sole location is la <unk> 12 worldwide sales office in Korea will become <unk>, 25th direct to hospital country.
On a different note recent foreign exchange movements are causing a markdown in our sales and op income estimates for full year 2022.
The strengthening of the U S dollar since our February 24th earnings call is expected to reduce full year sales by $3 million to.
The same issue impacts the bottomline, reducing operating income by $1 $6 million.
Despite these currency swings the fundamentals of <unk> business remain unchanged from two months ago.
Indeed full year 2022 organic sales growth is increasing slightly in today's guidance to eight 2% from seven 5% in the February 24th guidance.
Before turning the call over to JJ I would also like to mention that in March <unk> joined the NASDAQ U S broad dividend Achievers index.
This index is comprised of 373 public U S companies, which have increased their dividends for at least 10 straight years.
Our inclusion in the index underscores our longstanding focus on profitability and returning shareholder capital.
I'll now turn the call over to JJ.
In Q1, 2022, we posted a gross margin of 65, 6% a decrease of 70 basis points versus the prior year quarter. The strong U S. Dollar alone reduced gross margin by 70 basis points in the quarter, while a favorable product mix offset manufacturer.
<unk> inefficiencies.
As we look to improve our gross margin we continue to hire additional Burlington production staff and we're now at a record 194 Directionally Amber employees.
This 49% year over year increase is intended to reduce our hourly labor rate.
The hiring surge and inventory build should also guard against these three issues, which caused back orders.
Mark's MTR transition the great resignation and supply chain disruptions.
In another effort to improve our gross margin in June we will close our factory in Saint Etienne France.
This 17 employee factory was acquired in 2018 and produce <unk> and dialogue polyester grafts, Chevalier availability homes and biologic glue.
Going forward the manufacturer of Chevrolet Valvulotome will transition to our Burlington facility.
Production of other product lines, we will cease.
We plan to sell out our current stock of <unk> and <unk> after which we intend to transition these customers to our Burlington produced Alba graph polyester grafts.
We estimate that the closure will result in $3 $1 million of special charges in 2020 to $400000 of which are noncash charges.
Up to $3 1 million to $6 million will be charged in Q2 2022.
The closure should produce savings of approximately $1 million per year beginning in 2023.
Q1, 2022, operating income was $7 $9 million flat versus the prior year period, as 14% operating expense growth offset sales increases.
Operating expense growth was driven by a 30% increase in sales reps to 112 at March 31 2022.
Our Q1 operating margin was 20%.
Going forward, we expect operating margins, excluding special charges of 22% in Q2 and 22% for the full year 2022.
We ended Q1 2022 was $70 $1 million in cash an increase of $900000 versus Q4 2021 the.
The increase was largely driven by cash from operations of $4 $7 million, which was partially offset by dividends of $2 $7 million.
Turning to guidance, we expect Q2 2022 sales of $40 1 million to $42 1 million, which represents a reported increase of 1% at the midpoint versus Q2, 2021 and 5% organically.
We also expect operating income of $5 7 million to $7 million, which represents a decrease of 43% at the midpoint and 19% excluding special charges.
Our Q2 2022 EPS guidance of 20 to 25 per share implies a midpoint of <unk> 23 per share or 32% per share excluding special charges.
For the full year of 2022, we expect sales of $160 million to $164 million, which represents an increase of 5% at the midpoint versus 2021 and 8% organically.
We also expect operating income of $31 4 million to $34 million, which represents a decrease of 10% at the midpoint and 2% excluding special charges.
Our 2022 EPS guidance of $1 10 to $1 20 per share represents a decrease of 8% at the midpoint and up 1% excluding special charges.
With that I'll turn it back over to the operator for questions.
Thank you and to ask a question you will need to press star one on your telephone to withdraw your question Brad.
Again to ask a question please press star one.
And our first question comes from the line of Zapped Weiner of Jefferies. Your line is open.
Hey, guys. Congrats on another good quarter and thanks for taking the question.
Just first on.
On the head count expansion and how that plays through the Opex.
Can you just give some color there and how we should.
How we should expect that.
Is it all sitting in sales and marketing or is it spread between sales and marketing and general and admin.
This is George Zach Thanks for the Great question.
So a lot of this is actually sitting in cost of goods sold you'll notice that we're talking about a 49% increase in the direct labor head count year over year. So a lot of it is going to be about producing goods and putting them on the balance sheet. So a lot of that is segregated away from the op expense report, but of course we.
We discussed at a high watermark here again for sales reps and were up 30%. So we think that is indeed impacting the op expense statement as the year goes through and of course, we plan to hire more of them.
Counteracting that on the op expense line throughout the year is the FX effect that keeps on making that seem a little bit smaller even though of course, we all know we're hiring reps.
Got it that's helpful and then one just on <unk>.
Procedure backlog.
We've talked about in the past.
But just how are you guys seeing anything I know COVID-19 has been less impactful through through.
Through the tail end of the first quarter and even lessen in the second quarter, so far at least in the U S.
Any comments on procedure backlog or backlog or capture I guess now that COVID-19 is at least for a majority of.
The revenue in the tail or in the rearview.
Right, so I'm going to limit my comments just inside of the first quarter and not talk about Q2, which I tried to do and I would say I mentioned the sales numbers for January February and March we saw a real rush of procedure unloading in Q3 excuse me in March the third month of the quarter and things were really slow in the last week of December .
<unk> of 2021 as well as the full month of January . So it was very different they were being pent up in January and we saw it and get a bunch of them get released.
This in Q2 of 2021 on the call and I'll say this now in March it felt really like the customers at our throat pulling devices out of our company.
Just like they were in Q2 of 2021, when we all thought the vaccines, we're going to solve everything and it was a very strong Q2 of 2021, that's what March felt like.
No that's helpful. If I could sneak one more in.
On the <unk> call you mentioned that there was going to be 11% price increase on our graph in in January .
January it feels like a long time ago and hub.
With all the inflationary pricing that we're seeing in the broader.
Environment is there any risk or expectation to increase price mid year, I know that they will meet playbook as to kind of do at the beginning of the year and let it play out but any any expectation on another price increase.
Jack It's Dave Roberts at the moment no. We did put that 11% price increase through on January one and it all seems to be sticking so at the moment no, but obviously if circumstances change a lot we could reconsider.
Alright, thanks for taking the questions I really appreciate it have a good one.
Zach.
Thank you and as a reminder to ask a question you will need to press star one on your telephone again that is star one on your telephone.
Next question comes from the line of Brooks O'neil from Lake Street Capital. Your line is open.
Good afternoon, guys I guess.
Just a little.
Can you maybe.
Slow because they had been.
Grinding through a bunch of models and earnings reports, but.
Where we've hired.
30 reps, we're back where we are.
Started pre pandemic.
I heard you say the demand environment is really good.
We're thinking basically flat Q2 revenue.
So just help me to be absolutely sure I understand what's going on out there in the world.
Hi, Brooks its George again, I'll start and if someone else wants to jump in they can.
Please keep in mind. This FX thing we tried to focus on it is one of my key four talking points here every month, you get deeper in here, you're going to be working with a euro that's one O. Five that's we've keyed into all of our models and it was I think $1 12 in the in the in the in the Q1 and then it was something like $1 20, a year ago.
Same thing now is also happening to Japanese yen. So two places where we're having a lot of success Europe and Japan were getting killed by FX. So I would say there is that you may also be responding and maybe you didn't ask this question, but I'll go ahead and answer it Hey, why is there are only 5% organic growth between Q2 of last year Q2 2021.
In Q2 of this year.
And it's because last year was this this incredible full quarter of Oh, My gosh, we all vaccines, we're going to be fine and everyone. Then went out to the hospital and got all of those procedures. So Q2 of last year stands as justice Crazy good quarter and.
King and that we're going to be 5% above that organically, we feel comfortable with that I think that's a local address of the queue.
Two question as for the year again, as you get deeper into the year, you're going to have three months of each quarter that said this bad exchange rate. So that's hampering us a bit and you also see this the Korean thing a little bit you are losing revenue in Korea, but that's a very small piece of the puzzle and Brooks I'll give you. This is JJ I'll just give you a couple of dollar numbers because they are pretty <unk>.
<unk> year over year FX is hurting in the quarter $1 $7 million. So we think and then sequentially Q1 to Q2, it's almost a 700000 dollar hit to our top line. So these are not small numbers.
So the organic numbers still.
Nice enough as George said.
On a reported basis, you're getting whacked with that FX pretty substantially to bring this point home sorry to hammer this too much but no numbers.
At the last call the organic growth that we gave you all for the entire year was seven 5% and at this call. It is eight 2% so amazingly, even though it doesn't feel like it to you out there on the call. This is a bump in guidance believe it or not sales guidance.
You mean, you are telling me that units are some some measure like that is growing fast.
And getting better, but the FX thing is masking that.
Yes in a short answer yes sales if the if the FX rate hasn't changed since February 24th to April 28.
Sales guidance at this company would be up by a small amount, but it would still be up. So we would have bumped guidance up to account for the beat that we did in Q1 and then also some additional optimism about the last three quarters of the year. So this believe it or not it doesn't feel like it we're increasing guidance on the sales number if not for the FX problem.
Yeah, No that's really helpful. Because obviously, it's not clear to me I'm guessing there's at least one investor out there that's going to feel the same way in all of the color you just gave I think.
Hopefully, we will help me and probably other people as well which is great.
I guess I'll ask one more.
<unk>.
Curious the acquisition environment, Obviously, you got a nice war chest on the balance sheet.
Done a beautiful job of integrating our to graft.
We know the playbook.
Maybe David can you just give us a quick overview of what your what are you seeing out there in the world in terms of acquisition possibilities.
Yes, Thanks Brooks.
Short answer is.
Definitely have a few targets in the pipeline they tend to be.
Revenue of $10 million or higher definitely looking a little bit larger these days.
I mean, the core is disposables in implantables used by vascular surgeons, but we're also looking closely at adjacent markets. For example, peripheral endovascular, even cardiac surgery, where we get about 10 or 12.
Percent of our revenue, we'd like to stay in the niche markets. So we've got a few two or three targets.
I'm looking at I think valuations it feels like valuations sort of peaked I don't know about six or eight months ago 30, declining, but sometimes it takes a little while for the sellers to get the email on that so I do have one seller.
Sort of hung up on price, but.
Otherwise I feel like at least from a valuation standpoint, it's coming back down to Earth a little bit.
Great perfect. Thanks for all that.
I'm looking forward to the year, even though the FX is moving around all over the place.
Thanks Brooks.
Yeah. Thank you.
Sure.
Thank you and our next question comes from the line of Mike Kotowski from Barrington Research. Your line is now open.
Good evening guys a few questions.
First is there any way.
J J you can provide.
The data that we got from autograph.
Increase in revenue on the Assurant Valdez homes.
Handy by any chance you will yes. So so yeah autograft was up 16% I think in the quarter of sort of 11% price I think George mentioned that earlier in 2016 or eight I thought I heard 18.
<unk> was 18, except the whole category, which includes another bovine grafts was up 16, so truly autograph 18 gotcha.
Sure.
Sure I can give those two valve at homes up 10, 4% organically for the quarter and Zane assure up 15, 6% organically in the quarter.
Okay.
In terms of the sales rep figure.
And I can't remember, where I may have heard this on the conference call may be on an M. D. R. I think at one point you guys may have been talking about that number could go north of 120 is that still the plan or is that possibly pushed out until you you guys.
Work through some of this FX stuff.
Any commentary there.
Sure I think we reread the transcript from the last earnings call today before we got on I think at that call. We were talking $1 15 to 120, and I think we're pushing more up towards 120 in this phone call what you're maybe talking about is I think in theory, we always sort of talk about yeah, maybe maybe $1 million of.
Sales deserves one sales rep has a real high level talking point, but I don't think you've ever heard us come on this call and say $1 30, or $1 40, I think that's not what we've ever said I think we've always been bounded by about 120, I don't remember I don't remember talking over one I don't think so and Mike also I think to your earlier part of.
That question, there's definitely a balance going on between sales rep increase in head count and the bottom line and we're certainly watching that and it's a tough comp year right last year was the year when COVID-19 sales recovered, but expenses were still low the bottomline was strong and we're comping against that now and you can see that in our <unk>.
<unk>, but but I think sequentially, we sort of we like the answers, we're getting and we certainly want to balance that that growth.
The bottom line with the growth of the sales rep. So it's a little bit of a dance you have seen us do it before its sort of been in our playbook for a long time last year was a little odd and a good way on the bottom line because of Covid, but we're back at that.
Okay great.
Sort of piggybacking on part of <unk> question, just a bigger.
Picture question in terms of capital allocation, obviously M&A is a possibility you guys are making internal investments in hiring and production.
Share repurchase that I believe is still.
A live in.
Not active but authorized.
King.
Obviously, the dividend and you've raised it many years in a row, Georgia.
George can you just talk about.
Sure.
How you would sort of stack rank those different capital allocation.
Opportunities.
Any color on that would be great. Thanks, sure and I might add one or two but you got a basically and I think if I was sitting with my checkbook, the big checks I want to write our towards Dave's acquisitions. That's the number one check I Wanna right I want to write a check to the shareholders to let them know, we make cassia and we give it back to them and then third you are seeing this in.
This report and we do like to buy out our distributors when they get big enough and it's worthwhile on a project and you're seeing that in Korea, we like to buy out the distributors. So I would say on a strictly cash allocation I would say, that's where I'd go with my cash.
Are there other near term opportunities on the distributor side.
You know Theres always.
Short answer is yes.
Yes.
And Korea was one of three countries, so including <unk>.
Now of course, I don't think anything would be excited if we said we're going direct in Russia.
What the three the three big opportunities work Korea, Thailand in Russia, and we're in very early stages in Thailand, but we will see where that goes South Africa, as well and Mike. It's Dave just to Contextualize that Korea was I think the second biggest distributor for us so.
95% of our revenue is direct to hospital, so distributors only account for 5% of the revenue and so yes, we are.
We've gone direct in many countries over the years I expect we will continue to as George has described but in terms of like how much capital is directed normally we're paying maybe one times the distributors selling margin are selling profit. So it's not an enormous amount of capital compared for example to <unk>.
Acquisitions.
One last one in.
On.
Obviously, knocking out of the park with Autograft Autograft and.
This quarter in FX.
Huge drag.
There anything that you guys can do and I know, you're always sort of looking at it from time to time, you sort of alluded to.
With the closing of the <unk>.
Possibly doing some more of this but are there are opportunities on sort of the lower margin products rationalize possibly sell certain products.
Businesses.
Or are you guys sort of running the way you want to run at this point.
Sure Mike that's a great question I think we touched on this at the last call, but I'll expand on it even more I think you'd be happy to know that we consider these things a little too small to spend your guys time on but we in the last about 18 months, we've thrown about six devices not in the trashcan, but we've written them off youre feeling that in the <unk>.
I'll, even though we're not spending our time talking about it we've written six small ones off they are low low growth products, sorry negative growth products with bad gross margins. So we're excited that those are going away. The bag is simplifying and then it allows us to point or 112 reps at sort of nine better devices.
Rather than nine good devices in six bad devices. So yes.
The product line level and then Furthermore, at an SKU level last year, we got rid of 60 S. K use our stock keeping units.
<unk> numbers, if you will.
That was on a base of about 360, so we fully got rid of one sixth of our SKU that does include those those other.
<unk> line.
Divestments, if you will we're not selling them. We are just getting rhythm once in a while we're thinking about selling them, but they are product lines or small enough that no one wants to buy them and make the good news is that they were only sort of 1% of sales or so not a big answer on the sales line, maybe less of an answer on the GP line as a percent of GP.
So these aren't things that you would do it and then you'd go Oh, no near goes 6% of sales, it's not that it's more about operational sort of efficiencies streamlining sales rep efficiency and focus and all that kind of good stuff.
Okay very good very helpful. Thanks, guys. Thank.
Thank you.
Thank you and our next question comes from the line of Jim Sidoti from Sidoti. Your line is open.
Hi, good afternoon. Thanks for taking the questions JJ can you break out that $2 6 million charge, where that'll be on the income statement.
Yeah.
It's mostly severance charges, Jim there's a component that sort of fixed as a component you negotiate then theres some fringe on top of that and on the P&L, it's going to be its own separate.
Line above op income.
Okay and then.
I assume there's going to be some cost too.
Got up the facility to build the Valvulotome and <unk>.
In Burlington.
When will you start to incur those costs.
Right.
Sorry, Jim This is George I'll be happy to know its already done we've been doing it for the last 18 months.
Okay.
And then.
When we think about.
2023.
Will any of these charges spillover or should we.
Do you know when we started on our model for 2023.
So we should start at 121 to 131 number.
Yeah, there's going to be a small carryover probably a 100 150 Grand maybe 200 Grand in 2023 pretty small number. These are estimates Jim so as we get through those that negotiated piece of the settlements will be will be sort of updating them for you, but I think that's our best guess as of right now small answer next.
Year.
Okay, and then with Korea.
When you go direct or how many sales folks who you have in Korea.
Right day, one we'll just have a general manager in our office manager and then also on raw person regulatory person filing for more approvals I would say by the end of the year I don't know pick a number two or three mostly about soul and then later on getting out into the other parts of the country.
And that's part of the 120 that you're hoping to get to by the end of December .
Yes.
Houston too.
You know what.
I'm going to say in addition to just as on the fly answer Jim.
Okay, Alright, and then last one for me back to France, You said there were a couple of products there that you're not going to sell anymore.
Were there any material revenue at all.
Yes, so theres there were essentially three product lines that we purchased.
With that acquisition, one was some biologic glue, which we no longer sell yes, there was the valvulotome, which we're going to continue selling now manufactured in Burlington and the third piece was the Dacron graft.
And those we have a bunch of inventory on that Jim like three ish years, maybe more.
We'll sell that inventory out over the next years ish and then when we're done with that will transition those customers over to our Alamo graft product line. If you remember that Dacron graft product line that we manufacture in Burlington.
Jim the biologic Blu device the third one JJ referred to was a $600000 device in 2021.
It will have a little sales this year and zero in 2023, it's one of the fixed devices that I talked about with Mike Pitofsky that were writing off we're not interested in the future of that product line for its own reasons, having nothing to do with this factory transition.
Okay alright, thank you.
Thanks, a lot Jim.
Thank you and again, if you would like to ask a question you will need to press star one on your telephone again to ask a question that is star one.
And our last question.
A question.
<unk> Zeta from Spartan capital Your line is open.
Hi, Thanks, so much for having on and it's great to speak with you guys again.
My question would be more in line with the with Autograft. So obviously, it's been almost two years since the acquisition and still going strong.
<unk>.
As far as like the actual commercial presence for autograft.
Does management have any sort of expectation or anytime rents are for as far as like international rollout and to take out.
Autograph out there in foreign markets.
Sure. Thanks, a lot. It's a great question in fact, we do we are in the preparation stages to prepare our CE submission and we think that CE Mark submission will go in deep into 2023, and maybe we will have an approval in like 2025 or 2024, but theres a lot of work that.
Those into getting that ready from where the product line fits right. Now we started doing that that's on all of our mission statements around all of our offices.
Excellent and.
Before getting to that CE Mark.
Should investors expect any sort of increasing.
This will increase in R&D for for this product line, given how how well it's performed.
In the United States.
So in terms of development of the product I think no but in terms of all of the.
Standardizing the processes and getting them up to snuff I think there'll be a lot of R&D money spent on that but not on a change to the product that the hospital would see.
Excellent and I guess my last question would be I think you said earlier in the call and I might've missed it but what was the actual dollar amount the autographs brought in for Q1.
$6 9 million.
And it was an 18% organic growth rate over Q <unk> Q1 2021.
Excellent. Thank you so much. Thanks, so much for taking my questions. Thanks, a lot Javier.
And there are no further questions at this time.
Ladies and gentleman that concludes today's conference I would like to thank you for your participation and you may now disconnect.
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