Q2 2022 LeMaitre Vascular Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Welcome to the La mate vascular Q2, 2022 financial results conference call.
A reminder, today's call is being recorded at this time I would like to turn the call over to Mr. J J Pollute Greenough Chief Financial Officer.
Meet vascular. Please go ahead sir.
Thank you operator, good afternoon, and thank you for joining us on our Q2 2022 conference call with me on today's call are chairman and CEO , George Lemaitre, and our President Dave Roberts.
Before we begin I'll read our safe Harbor statement today, we will make some forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of $19 95.
Accuracy of which is subject to risks and uncertainties.
Never possible, we will try to identify those forward looking statements by using words, such as believe expect anticipate pursue forecast and similar expressions.
Our forward looking statements are based on our estimates and assumptions as of today.
28, 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 organic sales growth as well as operating income operating expense and EPS, excluding the special charge in gross margin excluding the impact of foreign exchange 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 dot com.
I'll now turn the call over to George.
Thanks, J J on today's call I'll cover several topics.
Number one Q2 organic sales growth of 8% number two biologics continued to drive our growth and finally number three our sales footprint continues to grow.
We posted record sales of $42 1 million in Q2, and 8% organic increase.
Q2 organic sales growth was led by Europe up, 11% and Asia Pac up 11%, while the Americas grew 6%.
Biologics drove Q2 2022 sales growth <unk>.
<unk> was up 21%.
Allografts, 25% and autograph to 11%.
Biologics now represent half of our sales.
The Japanese insurer launch continued to exceed expectations in Q2.
Did the Canadian cardiac allograft launch.
Q2 also saw the launch of allograft in the UK and we continue to target a German allografts filing by the end of 2022.
Army flow received the CE, Mark and Health, Canada approval in Q2, and we made our Chinese cardiac initial filing in June .
We also began prepping for a 2023 autographed CE filing.
Rep head count stood at 111 on June 30 up 26% year over year. We currently have 14 open requisitions and my Best guess is that we will land between 115 and 120 reps at year end.
We're also starting to make plans to open a Paris sales office in Q4, Q1, as France remains our only G seven country without an office.
Our expansive network of 12 sales offices is meant to put our medical devices is close to hospitals as possible and we continue to go direct worldwide.
In terms of activity level, we're seeing surgical Congress does begin to pick up and hospital access for our reps seems to be getting back to normal.
<unk> expenses in Q2 2022 were up approximately 55% over Q2 2021.
I'll now turn the call over to JJ.
Thanks, George Q2, 2022 sales were $42 1 million, an increase of 4% on a reported basis and 8% organically versus Q2 2021.
FX headwinds have been substantial and we lost $1 $7 million in sales due to the strengthening dollar in Q2.
For the full year 2022, we estimate we'll lose $6 2 million in sales due to the strong dollar.
In Q2, 2022, we posted a gross margin of 66% an increase of 20 basis points versus the prior year quarter.
Notably if we exclude the year over year impact of the strengthening dollar our Q2 2022 gross margin would've been 67, 4%.
We have increased our direct labor manufacturing team from 132 employees a year ago to 203 today, an increase of over 50%.
This should have a positive impact on our gross margin by the end of this year and should also guard against it the MTR transition supply chain disruptions and any lingering labor force scarcity.
In another effort to improve our gross margin in June we closed our factory and Sanjay Jen France.
17 employee factory produced Rollbacks, and Diane line polyester grafts, Chevrolet Valvulotome and biologic glue.
The manufacturer of Chevron valuable Valvulotome has been transitioned to our Burlington facility, and we intend to transition <unk> and <unk> customers to our Burlington produced Alba graft polyester grafts.
The closure resulted in a special charge of $3 1 million in Q2, but should produce savings of approximately $1 million per year.
Excluding the St. Adjourn special charge Q2, 2022, operating income was $8 $9 million, reflecting an operating margin of 21%.
Operating expenses, excluding the special charge increased 21% in Q2, as we continue to hire and invest in our sales regulatory and quality departments.
Our revised guidance reflects this effort and shows a 19% operating margin in Q3, followed by 22% in Q4.
The cash on our balance sheet continues to grow. We ended Q2 2022 was $75 $7 million, an increase of $4 $8 million versus Q1 2022.
The increase was largely driven by cash from operations of $9 $2 million and partially offset by dividends of $2 7 million.
Turning to guidance, we expect Q3 2022 sales of $39 million to $41 million, which represents a reported increase of 4% at the midpoint and 10% organically.
We also expect operating income of $6 8 million to $8 2 million.
Which represents a decrease of 17% at the midpoint.
Our Q3 2022 EPS guidance of 24 to 29 per share implies a midpoint of 27 per share.
On a full year of 2022, we are increasing our sales guidance to $162 7 million to $165 3 million, which represents an increase of 6% at the midpoint and 10% organically.
We also expect the operating income of $29 5 million to $31 2 million, which represents a decrease of 17% at the midpoint and 8% excluding the special charge.
Our 2022 EPS guidance of 99 to $1 five per share represents year over year decreases of 19% at the midpoint and 7% excluding the special charge.
With that I'll turn it back over to the operator for questions.
Okay. Thank you reminder, to ask a question you will need to press star one one on your telephone please.
Please standby, while we compile the Q&A roster.
Our first question comes from Zach <unk> with Jefferies. Your line is now open.
Hey, everyone. Thanks for taking the questions.
First one from US just a question on how the supply chain is being impacted we've heard through the first bit of earnings here.
Can you talk about supply chain impacts any impact.
From you guys.
Hi, Zack thanks for the questions George I would say generally not.
We would try to be looking ahead and hiring a lot of direct labor employees to be able to point employees at manufacturing certain products, but in general I don't think thats something were going to be talking about too much on this call.
And then just more forward looking.
Risks and conversations around economic downturn or recession, whatever term you want to use.
You guys have talked about increasing your hiring plans through this year any plans.
Well the recession risk impact hiring.
Outer years.
Okay.
I mean, I can't I don't think I could guide deep into 2023, but for now I don't think that applies to us I think we see things going fairly well right now.
Got it thanks for the question.
Yes.
Okay.
As a reminder to ask a question you will need to press star one one on your telephone.
One moment for the next question.
Our next question comes from Brooks O'neil with Lake Street. Your line is now open.
Thank you good afternoon guys.
I guess I'm curious.
Did I do the math right or is there a little slippage.
EPS guidance outside the.
Special charges.
If I did the math right.
What would you attribute that to.
Yes Brooks thanks, Thanks for the question.
<unk> last.
Guidance.
The EPS is down a little bit I would say.
The special charge was a little higher than we thought and I think we're continuing to hire along the lines that we've talked about the last couple of quarters.
Ill sort of slowing down on that and maybe that.
As part of that answer as well the FX topic is always around us on this and so yes.
Guidance I think FX for our top line by about $600000. So maybe half of that answer is sort of go into the bottom line as well. So there is another headwind for you.
And then in Q2, if you look at our Q2 guidance versus actual we were over by about 600000 for that so if you add those those topics all up I think that gets you sort of the slippage that you were talking about it's notable however that if you look at our Q4 guidance.
Our op margin in Q4 rebounds, and we're at 22%. So I think it's safe to sort of imply in there that the cadence of hiring sort of normalizes at some point, we've really been hiring a bunch of bodies that normalizes at some point and I think you'll start to see a little improvement there on that op margin in Q4.
Yes, that's great.
As you can see the numbers.
And the head count that George mentioned, so I totally get that.
You're being proactive and taking advantage of hiring people you DLR. Good people, who can really contribute to lament going forward in <unk> and <unk>.
Help you get through this environment right.
Well of course, we do but they are separate and the three pieces. One is building back the sales force we were at 112 before the pandemic and now at 111 or so we're still going a little further on that the second piece would be the direct labor folks I mean, we're up a time were up roughly 80 folks indirect labor and I think.
That is trying to go after the gross margin as well as preempt any supply chain disruptions. So it should get a better hourly labor rate on that and then also.
<unk> seen a struggle with the CE Mark backwards, the MD DCE, Mark and then the CE Mark coming at US, which is the MTR and we've clearly having to hire more bodies to handle that European approval system, which is all brand new and really locks in the middle of 2024.
So three types of bodies, there and we're hiring a lot of them.
Yeah. Okay. That's good so the last question for me obviously, the cash buildup is very impressive.
Curious, how you think about capital allocation, obviously the acquisition environment must be.
Pretty attractive.
The current overall macro environment, we see.
But there might be some other things you want to spend the money out too.
Yes, Brexit state. Thanks for the question, obviously the cash balance.
As JJ mentioned.
In terms of capital allocation, we have our dividend, which we increased to 11 years in a row.
Achievers index, but of course really the excess cash the growing cash balances is aimed at acquisitions I would say valuations certainly obviously led by the public markets, which peaked in med Tech maybe about 10 months ago, we see the valuations coming down usually there is a.
Lag and the messaging between the public markets.
Sellers, whether they be public carve outs are private but we do think valuations are slowly coming down we saw that PE firm take natus private for less than three times sales. So we think thats happening and our team is.
Hunting as we always do for these.
Core open vascular products disposables in Implantables with I don't know.
$10 million or more of revenue ideally in niche low rivalry market. So our hunting, we have a pipeline, but things have to go correctly for us that pulled the trigger so.
We're still doing our thing.
Absolutely I get that I lied I have a couple more questions just real fast one is.
Are you guys comfortable letting the biologic percentage of the total revenue.
Keep creeping up in or is that a focus or would you seek to balance that and then secondly, just curious how you think about the stock repurchase you got a lot of cash you got $20 million authorized do you think we will see share repurchase in this environment. Thank you very much for taking all these questions.
I'll take the biologics part.
On that yeah. So for US I would say, we're very comfortable with biologics now representing 50% of the company's sale. Obviously, we've been buyers in the biologics space, we've been not just acquiring in this space, but we are in.
And investing in additional regulatory approvals.
And so and of course biologics I think most lyft sirna snow are better at fighting and preventing infection synthetic implants, they have better handling properties.
And so yes.
We were thrilled to have 50%.
That being said it doesn't mean that the next product line or company, we acquire will be in biologics, we like non biologics as well, but it has been a theme and we're very comfortable with where we're at.
And then Brooks as your share repurchase question of course.
I wouldn't tip my hand as to when we're going to do a share repurchase if ever I would point out that we did issue the equity last summer at about $53 a share approximately thereabout.
50, 454, so we're sort of tied up to that right now I think today, the stocks of $48 or so.
It will be a little odd for us to take the action of selling those shares than just run back and use it as a buyout facility or a repurchase facility at 48 Bucks, but we'll never Guy I don't think you ever catch us guiding on that topic.
Okay got it thanks, a lot and keep up all the great work you guys. Thanks a million Bucks.
Uh huh.
One moment please for our next question.
Our next question will.
Will come from.
Mr. Weiss with Stifel. Your line is open.
Hi, This is Tony <unk> on for Rick Wise.
Given your second quarter.
<unk> stated in the press release that the annual guidance has now been increased to 10% organic growth I know this might be early to ask.
Or do you see this.
Growth is sustainable going into 2023.
Hey, Thanks for the question and welcome to this phone call.
You are right to our test that I, probably don't want to give guidance into 2023, but we're real excited I think the cadence is.
10% organic for Q3, and then the implied is 11% for Q4, so some nice numbers in there that's sort of the high end of who we've been recently, but I don't think I'd want to dip into into 2023 until I have two.
Okay. Thanks, and I have one more question can you tell us more about what you expect as far as currency impact.
During the second half of 2022.
That there is a strong the strong dollar reduced sales by $1 7 million during this quarter.
Yes. Thanks for the question so for the full year year over year, we think it's about a $6 $2 million impact.
A year ago and from basically 118 to 105 full year versus full year.
Back half of the year, specifically towards your question.
Feels like a couple of million dollars in Q3 year over year negative impact of sales and maybe one $7 million or so in Q4 negative impact to sales. So I'm sure you've been hearing this in all of your other companies, but it's a big topic for us.
80% of our sales outside of the U S. A lot of that in euro denominated, but the yen really.
Being weaker against the dollar as well. So this is an important topic for us not just on the sales line, obviously, but obviously on the bottom line too.
Okay. Thank you.
Thanks, a lot.
One moment please for the next question.
Yes.
Our next question comes from Matthew Mission with Keybanc. Your line is now open.
Hey, good afternoon, and thank you for taking the questions.
You guys are doing.
Really good work on the gross margin side.
Hum.
Manufacturing environment I'm just curious.
Your confidence.
Trajectory of gross margins back into that high <unk> low <unk>.
I believe over the next couple of years.
I don't know about the next couple of years, but I'll speak through through this year and generate trends of what's going on in gross margin.
I generally think more specifically in the current quarter and that sort of guided quarters Theres a couple of nice trends going on.
One is.
Right.
Sort of gotten a little more team these days.
Thanks, so much.
Our EBIT will be in the coming quarters.
So thats sort of nice but in addition, we've hired as George mentioned.
And I think I mentioned in my piece.
It's also a bunch of GL folks.
And this is going to help the margin as we get into the back part of the year and so as we hire more folks and they make more units and absorb the same amount of fixed costs, we should be getting.
Furthermore, more improved margins on that.
In addition, we're we're working on internally some nice cost cuts in and around the cost of goods sold line and so in different areas of our our Cogs.
Business, where we're looking at some nice important cost cuts that we think comparison.
Half of the year.
So I would say.
There is some sort of nice trends.
Theyre going forward more broadly I would say.
Price hikes are something that we do a pretty pretty regularly.
Regularly in January as you know every averaging 4% to 5% a year average selling price hikes and so you can certainly think that that's going to I would imagine continue overtime hopefully some of these other trends do as well if you look at our gross margin as it plays out through the year, starting with 65, 6% in Q1 now.
Saying $66 seven for Q3 and 67 five for Q4. So it is a nice cadence we think it's doable and we think we have some nice dynamics entirely.
Okay excellent then as a follow up question on the biologics.
Okay.
Seems like there's more of a focus on industry, especially in the prepared remarks are.
Are you seeing like share gains with dock with doctors with biologics versus synthetic is there is there some kind of change.
That's a cargo to like the last year or so.
I mean this is George sort of following up on David's answer previously, yes in general I do it is pretty clear that in a lot of categories. They switch to biologics, it's nothing new though it feels like it's a <unk>.
<unk> 15, or 20 year secular trend, where the docs to prefer to use biologics.
Handle better than the synthetics and the doctors believe theres not that much paperwork out there for this for the doctors believe they have better results with the biologics.
Thank you very much.
Thank you.
One moment please for our next question.
Our next question comes from Michael Kotowski with Barrington Research. Your line is now open.
Thanks, Hey, guys a few questions.
So I am assuming J J based on what you just said any sort of lifted some of the reasons you had some confidence in that.
The positive gross margin guidance in the second half I'm, assuming there are no.
There is no contemplated pricing increases between now and your traditional January is that fair. So essentially we get the gross margin improvement and then through the end of December and then in January we actually see some presumably some price hikes.
The way you guys Hey, Mike.
I mean, it hasn't been a topic with all the inflation issues going around the agility something sort of mid year and taken other price hike and I think we've decided at least up until this point and you know things can change, but I would say probably not but they could but we've decided what are the annual price hike guys that sir that's sort of our.
Sure.
Our MLR and we'll continue to do that so I don't think you guys in the back half of the year and Mike maybe the bite was pretty big this year I think we're thinking it's about 8% or something like that so.
The bite, we took was pretty big already and maybe that's why we don't feel the need to go back again.
Okay, Alright fair enough.
That bodes well for not only the next.
A couple of quarters, but then beyond that.
A question around the hiring you've done for MTR is there any way to put a number on what that cost due to this point and then sort of what you think between now and may of 'twenty for that could cost you incrementally.
Sure I'm not sure I want to go into 'twenty, three 'twenty four but I can tell you that.
If you look at our R&D line, which was 8% of sales in Q2 2022. Most of these ups that are taking place in that line are about regulatory approximately 5% of that 8% is regulatory not old fashion test tube type R&D its regulatory approval stuff.
So it's a big number does anyone have the quarter over quarter and regulatory number for Mike maybe that's maybe that's a help or even all R&D.
So all R&D, Mike was up about 700, K a 26%.
Then within that.
Regulatory was up about 500, K or 28%.
So the other two they were up markedly as well, but regulatory being the big piece of that and as Mike its not just bodies, there's a lot of outside services and outside testing.
And that goes on in and around these topics of MTR and other regulatory topic. So it's both of those things that are pushing that number up.
If I could use that as a small springboard to say that we did pass through an important milestone here. The last day of June we got what should be our last MD D. CE Mark we got the omni flow, we've been pushing hard for that approval for a bit now for about 18 months. We did finally get that product is shipping to Europe and in Asia.
Shifting to hospitals now so we're sort of done if you wanted to buy the story up into the old fashion story of the MTV story, we're now sort of done with that thing and now all of our all of our engines are geared towards the MTR part of the story, which is the 2024 story that youre talking about.
Okay, Alright very good.
So can I, just ask and again I guess I'm not.
<unk>.
Wanting specific guidance, but.
I'm trying to get a handle on do you guys have to do a lot more incrementally as you look forward or have you sort of put the.
The bodies in sort of a consultant or whatever else you're utilizing here in place where you sort of just run it from like I guess, what I'm really getting after is that 8% of R&D turned into 9% and 10% or does it stay roughly around 8% as we move forward.
Okay. So yes I am.
I'm not going to give an exact number but I do feel like it pushes upwards from eight we've always been a light R&D company and maybe as the gross margin is repairing we have a little bit of room to play with in a place you would put money probably is in growing out the sales force and making sure that you get those <unk> approved so yeah sort of working on that towards the nine I guess.
Haven't really thought about the exact number.
Yes.
You want to think about we have three types of engineers at the company. We have a manufacturing engineers, we have manufacturing transfer type engineers, and we have a quality engineers and we went into the year trying to get to nine of each of those and the goal was 999, we're now saying Oh, we should be 10, 10, 10 and our <unk>.
125 plank set Mike we do five year internal <unk>, it's trying to get to $14 14 in 2014 with those three types of engineers I call out those engineers because they are the expensive bodies.
R&D and they are also the things that would help us get the MTR. So it's relevant to what you're talking about here, but yeah. We continue to push hard on this topic for sure you can't.
$40 million.
25% European is our business and 5% Asian, So you can't let that 25 go you just have to keep putting resources at it got.
Gotcha Gotcha.
J J forgive me if you explained this earlier.
Right.
I guess, what what happened there and what.
What's the expectation going forward.
Yes, So we had the one time special charge of $3 1 million, that's essentially what that why that spike.
We couldnt get the benefit from that mine. So it didn't benefit our tax rate is actually lowered pre tax but is the tax rate was effectively that never happened. So the effective tax rate is actually higher.
So going forward, though you go back in the mid twenties.
Yes, it should normalize.
Alright, guys Thats all Ive got thank you.
Your numbers until later.
Okay.
I do not want them.
I definitely want them alright.
Alright.
Depreciation and amortization too.
Seven.
Stock based comp was 138.
And Capex 940.
Thank you so much you can save yourself a tax benefit.
Thanks.
Thanks, Mike.
One moment please for our next question.
Okay. Our next question comes from Jim Sidoti with Sidoti <unk> Company. Your line is now.
Yeah.
Hi, good afternoon, and thanks for taking the questions just two for me.
On.
The charge related to the consolidation of the French facility do you think you're done at this point or could there be additional charges spilling over into the third and fourth quarter.
Yes, there'll be little dribs and Drabs Jim.
Maybe 100, K or so next quarter and then maybe 50 to 75 K for a few quarters after that.
Nothing that pops up like it just as in this quarter, we basically accrued everything we know about and then theres some things that.
You have to wait to.
Put them through the P&L or you don't know.
Alright.
Sure.
You mentioned the.
Sure.
We filed for approval in China.
Is that similar to the FDA within the 90 day clock with that or can they take as long as they want to process that.
Right. So the 90 day clock you've heard about for the FDA is for regulatory clearance type items not for approval items.
And so no there's no sense of o'clock over there we've heard rumors that it takes about two years remember this is a clinical trial.
We've worked with for years now to get to that filing and so I feel if you partly asking how long does it take our guess is as good as any ones that we feel like it's two to three years here.
Alright, and then just on the Big Big picture it.
Like organic growth is accelerating into the back half of the year.
Would you attribute that to.
Procedures.
More procedures being done or are the sales folks you hired already starting to contribute.
Okay. So I would say that the three.
Three things are the sales reps that you talked about but I also say.
It does feel like there's a slow lifting of the COVID-19 topic around all of the procedures and then thirdly, you remember that in Europe last year, we had all these M D. DCE problems and those are now with the army flow approval June 30th those are all now gone away and so we got a nice lift in U.
See this in the numbers the European numbers are better than the American numbers, 11% organic in Q2 versus 6% for the Americas in Q2. So those three things are helping us in the year and it's great to be back in the 10 to 11. This is a good feeling.
Okay alright, thank you.
Thanks, Jim.
One moment please for our next question.
Our next question comes from Javier <unk> circa with Spartan capital. Your line is now open.
Okay.
Hi, good evening, everyone. Thanks for taking my question.
My question is around autograft.
Any others.
Largest acquisition of the company and there still seems to me there's still there's a lot of room to grow could you provide more color as far as going forward as far as any price increases or any tier ones that could like really.
Show the continued performance of autograft as a top priority.
Let me.
Sure. Okay. So we put it in the 11% price hike this year and it's playing out fairly well I think organically were up 13% or something like that for the year.
I think the big shot on goal that you might be excited about looking forward to is when we file the CE Mark for this thing and bring it over to Europe , It's never been brought to Europe and so this year, we're using as an opportunity to get our ducks in order to get that filing ready to go and then in 2023, we anticipate making the filing to the notified body.
And maybe that gets approved in 24 or 25, I think thats. The big shot on goal and then Theres also a Canadian topic at some point, although we haven't really fleshed out our plans as much on Canada as we have on Europe , although usually when you are ready to do a European filing. It means youre books are in order to do a Canadian filing as well.
Excellent thanks very much.
Thanks Javier.
Okay.
Oh.
Please standby for our next question.
Yeah.
Our next question comes from Zach Weiner with Jefferies. Your line is now open.
Hey, guys. Just one quick follow up I know you announced last quarter, the closing of the plant in France.
And you teased out the numbers there any plans for additional plant closings that we should be ready for or watching for over the next.
Six months or so.
Sure. So zach thanks, a lot. It's a good question, we only have two factories remaining ones in Chicago ones in New Jersey definitely feel like over over time, we've been trying to always give the employees. The heads up about whether we're going to close the factory or not before wall Street. So that'd be the first guys to here and we have not said anything to any of them.
About this at all so for now nothing but we'll get to them first and then you guys second if and as we make a decision like that.
Fair enough I appreciate the color thanks, guys.
Thanks Zack.
Ladies and gentlemen that concludes today's conference I would like to thank you for your participation and you may now disconnect.
Eight day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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