Q3 2022 LeMaitre Vascular Inc Earnings Call

October 27, 2022

[music].

Yeah.

Good day and welcome to the Lemaitre vascular Incorporated's third quarter 2022 earnings 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.

<unk> of Lemaitre vascular. Please go ahead Sir.

Good afternoon, and thank you for joining us on our Q3 2022 conference call with me on today's call is our President Dave Roberts, George Let me Chairman and CEO is unable to be on the call due to the birth of his daughter it last week.

Before we begin I'll read our safe Harbor statement today, we will make some forward looking statements within the meaning of the US Private Securities Litigation Reform Act of $19 95, the accuracy of which is subject to risks and uncertainties.

Wherever possible, we will try to identify those forward looking statements by using words words, such as believe expect anticipate pursue forecast and similar expressions.

Forward looking statements are based on our estimates and assumptions as of today October 27, 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 of <unk>.

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 will meet dot com.

I'll now turn the call over to Dave Roberts.

Thanks, JJ on today's call I'll cover three topics first Q3 organic sales growth of 7%.

Our continued focus on biologics and third hiring in two key areas.

We posted sales of $39 million in Q3, a 7% organic increase.

Q3 organic growth was led by APAC up 11% and EMEA up 8%, while the Americas was up 6%.

From a product perspective, carotid shunts up 23% Artur graphed up 12% Allograph up 10% and Embolectomy catheters also up 10% drove growth.

<unk> benefited from a competitor exiting Europe due to the more stringent MBR CE requirements, while embolectomy catheters benefited from our competitors back order.

These increases were partially offset by valvular tones, which decreased on a reported basis, but were flat organically.

Biologic devices grew 7% organically in the quarter and represent 50% of our sales.

We continue to invest in new biologics approvals and in Q3, we made two key regulatory filings.

In Germany, we submitted our application for allografts and in Japan, we submitted the carotid indication for <unk>.

We've also recently begun shipping the insurer to Korea and expect our first direct to hospital sales there in November .

On September 30, we had 558 employees, an increase of 27% year over year.

We focused our hiring in two key areas sales reps and direct labor over.

Over the same period, our sales rep headcount increased by 28% to a record 118.

While direct labor head count increased by 54% to a record 213.

These initiatives should drive sales and profitability in the quarters ahead.

We expect to end the year with 125 sales reps.

That I will turn it over to JJ.

Thanks, Dave Q3, 2022 sales were $39 million, an increase of 2% on a reported basis and 7% organically versus Q3 2021.

FX headwinds continue to be substantial and we lost $1 9 million in sales due to the strengthening dollar in Q3.

For the full year 2022, we estimate that we will grow 9% organically versus 2021, and then lose $6 4 million in sales due to the strong dollar.

In Q3, 2022, we posted a gross margin of 64, 2%.

A decrease of 60 basis points versus the prior year quarter the.

A strengthening dollar decreased our gross margin by 170 basis points while unfavorable.

<unk> sales mix was offset by average sales price increases and manufacturing efficiencies.

As Dave mentioned, we've increased the size of our manufacturing team.

This should have a positive impact on our gross margin in the first half of 2023.

Increased direct labor head count should also increase output and mitigate any potential MTR transition our supply chain issues.

Q3, 2022, operating income was $6 $2 million, reflecting an operating margin of 16%.

Operating expenses increased 20% in Q3, as we continued to hire and invest in many areas, particularly our sales and regulatory departments.

Before year end, we intend to submit MTR CE Mark applications for five additional products building on the seven we submitted in 2021.

Our revised guidance reflects these efforts and shows an 18% operating margin in Q4.

Yes.

The cash on our balance sheet continues to grow. We ended Q3 2022 was $79 $7 million, an increase of $4 1 million versus Q2, 'twenty, two and $9 $8 million since the beginning of the year the.

The Q3 increase was largely driven by cash from operations of $7 $3 million, partially offset by dividends of $2 7 million.

Turning to guidance, we expect Q4 2022 sales of $39 8 million to $42 $2 million.

This represents a reported increase of 4% at the midpoint and 9% organically.

We also expect operating income of $6 6 million to $8 2 million, which represents a decrease of 11% at the midpoint.

Our Q4 2022 EPS guidance of 24 to 29 per share implies a midpoint of 26 per share and represents a decrease of 5%.

Before opening it up to Q&A I'd like to welcome our newest board member Martha Shelton, who joined US in September .

Martha has over 20 years of life Sciences experience, most recently as president and CEO of <unk> orthopedics and prior to that rotation medical.

She currently serves on the boards of CV Rx and added momentum.

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

As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Your first question comes from the line of Michael Cohen from Jefferies. Your line is open.

Alright, Thanks, Hi, Dave Hi, J J. Thanks.

Thanks for taking the questions and congrats George on the New addition to the family.

Just had a question on <unk> I think guidance for 10% organic growth and you came in at around 7% do you think you can just talk about what drove the shortfall.

Expectations, and maybe comment on how activity trended throughout the quarter.

Sure.

Thanks for the question Mike.

One of the big part of the story, obviously going through everything is FX. These days and so versus when we guided FX hurt us on the top line by more than a 100 Grand maybe 125 to 150 K or so so that's a piece of the story.

And Valvoline Tom's had a light.

Quarter as well.

Sort of maybe five or 600 grand less than we were thinking when you gave guidance.

And I would say that they just sort of hit an air pocket in that happens sometimes.

And so it was a light quarter there.

And we also had a little bit of a back order issue with one of our product lines.

In Europe , and that hurt us a little bit as well and I think those were the sort of the topics in and around why we miss the cadence.

Through through the through the quarter was sort of low July low single digits, and then August sort of low double digits, and then sort of high single digits in September or something like that in terms of growth rates. So there wasn't really a necessarily a clear pattern.

Increasing R&D spending that you could sort of glean from that so I would say.

Yes, it was a little lighter than we thought but still up 7%.

Organically, which is which is pretty much in line with sort of where we've been historically in that seven or 8% growth rate.

Sure. Thank you that's really helpful.

And I guess, just as a follow up.

Can you talk about I guess, how activity has trended through October .

And around the back order issue in Europe , I guess I'm getting too.

How do you can you talk about your confidence in accelerating from 7% organic 9% in the fourth quarter.

Yes, Mike it's Dave Thanks for the question.

As JJ said, there wasn't really much of.

A pattern that we could glean from the months in in Q3 and for that reason, we're a little bit reluctant to talk about.

Procedures in all of that but suffice it to say that obviously the organic growth rate that we're guiding for is up to 9%. So we're feeling good.

With that I'll take your end.

Of course.

One of the topics that we have grown our sales force.

Really quickly.

As we talked about in the prepared remarks, we're up to 118 sales reps, that's up 28% year over year.

And so we're hopeful that.

As these few months continue to pass.

These reps will be able to gain more traction and and they and thats part of whats, giving us the confidence to increase the organic growth rate in Q4, and then Mike I can give you a little more sort of sequential flocks might help you sort of fill in some of the story here Q3 is typically a little bit lighter.

Then Q4, and so as Youre going from Q3 to Q4, and I know you asked about year over year growth rates, but maybe just a little color on how you get from one to the next you can expect a nice uptick from seasonality.

The days, we actually have fewer days in Q4 than Q3, so that might hurt us a little bit in FX is going to hurt us a little bit as usual also but we talked about that that valvulotome pizza earlier in Q3, and then kind of guess we will have a nice rebound in valvular tells from Q3 to Q4 that will help us pick up a little a little volume there as well.

Great. Thanks for all the color.

Once again to ask a question. Please press star one on your telephone keypad.

Your next question is from the line of Matt <unk> from Keybanc. Your line is open.

Hey, guys. This is Brad thats been on today for Matt I.

Just wanted to follow up on guidance. Thank you just touched on revenue May center around FX and some of the issues around Valvulotome just looking at margin now.

It seems like it was definitely.

It looks like a local trough for you guys.

Just wondering outside of FX, which you quantified what some of the bigger moving pieces, we should be thinking about.

Impacting that sequential decline and then maybe specifically just giving us some sense around how some of the broader macro headwinds around inflation and then supply chain, maybe maybe impacting your near term trends.

Yes, sure. So yes, the gross margin came in weaker than we thought and you can see that.

A piece of that is clearly FX.

And we talked about that I'm going to say two or 3% of the two five.

Delta there is probably FX since when we gave guidance last time, so not not a small part of the answer mix was a larger part of the answer though because valvulotome has come in with a really nice gross margin and so when you have a weaker valvulotome quarter, you do feel that in the gross margin and so mix in <unk>.

Total Navy was <unk>, 8% or a third ish of that Delta that we're talking about and Valvulotome is where a big piece of that and then on the manufacturing side, we probably had a little bit more inventory write offs or.

Yield topics or scrap topics in terms of inventory.

Then we've had typically and so that was a piece of the story and then the high level piece.

What Dave talked about a little bit I think earlier, which is that the direct labor piece is an important part of our story going forward on the gross margin line and they probably I, probably thought that we're going to get a little more efficient a little more quickly we've done a lot of hiring.

And you got a higher and <unk> got a good inventory more and then you've got to get them trained and so given the number of folks that we've gotten in the door I think it's taken a little bit longer to get them trained and efficient than than I had thought and so I think thats dragged down our gross margin answer in Q3 versus guidance.

Alright, Thats really helpful.

It sounds like some of those moving pieces or it could be more short term in nature and then just thinking about some of the longer term initiatives that you guys have in place.

How does it look like.

You may be accelerating some of the investments just given like your Rep Count Rd.

<unk> global as you were talking about for exiting the year Youre talking about like increasing the number of MTR submission as well as because of international product approvals.

Why is now the right time.

And it was it planned or does it feel like you might be pushing forward a little bit faster.

Yes.

Brett It's a good question, obviously with MTR there is a timetable on that we the last date, we can ship MDT products to Europe is in May 2024 last day, we can sell them in Europe as May 2025.

The good news on MTR is we're right on glide slope, we're feeling good about we've obviously submitted seven MTR applications.

At the end of last year and this year within the next couple of months, we'll submit five more I think that will just lead one or two.

In 2023, so we're feeling really good about that I think that explains the timing of the regulatory spend which is always plan.

In terms of the sales force expansion.

I would say for years and years. This has been a really solid.

<unk>.

For La made investing I think maybe the principal asset of the company.

And so as I mentioned, we do expect to get to 125 by the end of the year at the moment.

When we get to 125.

A typical lemay on average limit territory in terms of sales will be about one point to $5 million.

Of course, often in that tech, we hear sort of the $1 million million dollar territories. So we feel like there are a lot of geographies a lot of territories, where we could still expand we do hear many instances, where our reps are unable to get to cases for example, allografts because it's too far away in their territory.

Shrinking territory size will help address that and frankly I think that will also be a positive for our sales reps. The more reps we have the small of the territories become the more interesting I think the job is the more appealing and.

That should be good in terms of retained hiring and retaining sales reps.

I'll add to two other concepts about why now one is as we went through Covid, we cut back pretty sharply.

On the head count in all areas probably to sharply.

And so that rebound in hiring took a little time to get going and I think.

We decided that this year really the organization really needed to fill in and a lot of areas not just reps in deals.

But in other areas as well and quality and regulatory and admin and so I think it was a welcome answer from an operational standpoint, generally which is it was the right thing to do for the organization and then for the sales reps I would say we haven't done an acquisition in a couple of years, Dave keeps us pretty well stocked up every year with a deal and when we kind of got Lucky and.

This sense operationally that we haven't had one for a year or two so maybe it's a good time that the reps don't have to focus on a new device necessarily and we can we can so we can sort of focus on building that rep team and so maybe that was a good time as well.

Alright, thanks, very much guys I appreciate it.

Your next question comes from the line of Brooks O'neil from Lake Street Capital markets. Your line is open.

Good afternoon, everyone.

Obviously, the cash buildup is notable and.

J J just mentioned acquisition. So just curious how you guys are thinking about capital allocation now.

Investing heavily in the business maybe it is a good time to be out there and what's the acquisition environment looking like David.

Yes, Thanks Brooks good to hear your voice.

So obviously.

Our focus is to generate cash returned to operating leverage and as we do generate cash.

Probably from my perspective.

Allocating cash to acquisitions is has been a successful strategy for <unk> for a long time I would say after that of course is our dividend and this dividend Achievers index and we're very proud of that and it signals our commitment to ongoing profitability and then there are other cash needs.

Mahler like Capex, and maybe acquiring distributors or whatnot, but on the acquisitions front, yes, it's Ben.

Two two and a half years since we've done an acquisition.

And.

We are definitely out there.

Looking at targets, we have taken a run at one or two in the last many months don't have anything to report at the moment, but the pipeline looks good of course. The criteria is generally the same which was looking for products with minimally 5% or $10 million of revenues in open vascular surgery.

Although we do look a little bit at Endovascular in cardiac surgery, we derive about 10 or 12% of our sales in cardiac now on another really important piece of it is.

The niche slow rivalry aspect, where we'd like to be number one or number two in our space. So I would say we're on the hunt and we've got I've got a really solid team, who I worked with on it and.

As the cash balance builds of course, it gives us greater optionality.

To do larger deals. So we're out there hunting valuations are down of course, a little bit with IHI down 26% year to date et cetera, and maybe deal flow has slowed a little bit in general in terms of what the banks are reporting, but yes, we are out there hunting and.

Just like one real estate valuations are down that might be a good time to buy a house, maybe it's a good time to acquire a company at some point.

Absolutely.

I assume the shutdown of the plant in France, when they bought it as you guys expected.

Yeah, I think it has.

It's a whole dance at a whole process over there.

And there is all sorts of legal formalities that you got to make sure you work your way through over in France, but yes.

The building is shut in actually sold we recently sold that building so.

We are Don manufacturing over in southern France, we're still negotiating with a few.

I'll call it a handful of folks on severance, but we.

We feel like that $3 $1 million number we gave you last quarters kind of going to be about the right answer and just to add.

Because the closure happens so close to the end of the quarter last quarter, we were unable to to have that $3. One deducted for tax reasons in Q2, but we were able to get that in Q3. So that's why you see an abnormally low 11% effective tax rate in Q3.

Cool, Thank you and J J mentioned, the Bell <unk>, Tom a weakness.

You guys, just think thats kind of.

The ongoing ebbs and flows of the business, there's nothing you'd point to that would suggest any change in the underlying market for those yes, I don't see anything.

Really in value terms in particular that would lead you to say there is some systemic topic there.

Felt like an air pocket to me.

In the quarter and they happen every once in a while.

And then a rebound is a franchise that has been around obviously with this company since the very beginning of time it remains.

An important part of our portfolio and its performed well.

Over the sweep of time and more recently as well so there may be broader topics in different geographies in terms of case procedures.

Staffing at hospitals, maybe some COVID-19 topics.

Different geographies.

Remember, 40% plus of our sales are not in the U S. So those can sort of swing around and get you from time to time, but.

By and large the sort of mutual fund approach of products has served us well in this case about the terms.

We did take a little dip, but I, but I think thats not a topic necessarily going forward.

Great. Thank you very much for taking my questions.

Your next question comes from the line of Rick Wise from Stifel. Your line is now open.

Hi, This is <unk> on the call for Rick Wise.

I know that you mentioned on the next quarter that you acquired.

And you're planning to increase to 125 sales reps this year.

It sounds like this year in general.

A lot of hiring I was wondering whether any of the macro pressures have affected.

Your decision in hiring at least the rate of which youre hiring and how this might proceed going into 2023.

And then additionally, I was wondering whether you could elaborate on where you might be underrepresented in salesforce geography.

And then ballpark do you have an idea about where you might want to be in 2020 March.

Our sales force head count.

Yes, Hyperpnea, Dave great questions.

In terms of the macro of course, we've all been reading in the headlines for months and months and months how difficult. It is to hire and there are a.

A lot of people are switching jobs I'd state law made.

It has not been immune to that we've we've done a lot of hiring however, we've had high turnover in the sales force I would say a little bit and in RTL, even though from a companywide standpoint, our voluntary turnover here in Burlington is five or 6% below the bench.

Mark but sales rep turnover has been something we've lived with for a long time. So I think part of our our clothing response is to is to hire more reps.

Expected that there will be a certain amount of turnover so that the turnover dose effect or the number of reps, we hire and the cadence.

And another piece of the macro that effects, our reps and frankly their ability to gain traction is with <unk> since COVID-19.

Our reps have had less access either to the operating room or the physicians of course, it's gotten better and covet itself of course has gotten a lot better theres still isolated countries like Japan, or 80 cities in China, but by and large the hospitals and Oss are open but the rep access is limited so with.

Our reps, who do a fair amount of on the job training I think I think that that COVID-19 that rep access limitation has maybe slowed their training.

A little bit so and in terms of I might be missing a question, but you were asking where are we well represented in underrepresented. We've been doing a lot of hiring in the U S and frankly in part due to the Arctic graft, which has just been.

A very solid acquisition and we keep hiring sales reps to promote that product I would say if you look around the world regionally of course, China is the second largest medical device market in the world will only have two or three sales reps there, but we have a limited number of approvals. There Korea. We just went direct there early.

<unk> this year and we have one sales rep on the ground, we haven't sold a product yet in Korea, but we expect to hear in the next month or two and then we should be able to add reps. There. So I'd say at a high level, maybe APAC is a little bit under represented for US and then and then we want to expand in the U S.

Continue expanding in the U S as well.

Great that makes sense. Thanks, and then I have one more question.

Actually every company that we've heard from so far it has discussed how macro pressures affecting that business.

This performance.

Where do you see the macro pressures stabilizing or even improving.

Oh, that's an interesting one.

I think again for US you got to look by geography.

And so in the.

The U S.

It feels.

Like maybe it could improve a little bit.

In the U K, we heard stories about there being lots shortages.

So maybe there's a little bit of outsized improvement there potentially I think was the Japan that had a COVID-19 lockdown topic fairly recently and so there is there's been pressure there, even though our zena share product lines doing very well.

In Japan, maybe from a macro perspective, theres room to breathe, a little bit more in Japan as they get out of Lockdowns. So it's really almost country by country to answer that but maybe those are some of the highlights.

Great Okay.

Just one from me.

So I know that interest rates are obviously, increasing.

How do you see those two factors.

Like your business decisions and decisions of potential M&A candidates going forward.

And just to tie it into I think something that you said last quarter.

Your evaluations on today when it comes to M&A.

Are you seeing that those evaluations are finally coming down are they coming towards your sweet spot and then.

When do you think that might be the case.

Yes, it's sort of hard to.

Predict that really reliably and thread the needle obviously with interest rates rising we're happy we have no debt and almost $80 million of cash. It means that we're actually generating interest income for our shareholders, which is sort.

The silver lining to having all of that cash but.

In terms of interest rates rising I would say.

Obviously, that's depressed valuations as we've mentioned already it's really hard to predict how much how much further down valuations go and what that trajectory looks like but in terms of leverage.

To the extent that we use debt to fund acquisitions or order of operations is to use cash on hand, first and we probably have $50 million to $60 million of cash on hand that we could use we want to leave a certain amount of working capital, but then secondly.

Using that well the debt market is not what it used to be and so we're probably a little bit more cautious about how much leverage we would use in an acquisition and then the cost of that debt would be higher so we have to factor that in as well, but in the meantime, I don't say, we necessarily try to time them.

Market in terms of that med tech valuations going up or down, but clearly they are heading down and I would say as a rule public company owners.

Potential carve out targets are probably theyre getting the email sooner than private company owners, who may be reluctant to admit their business is worth less because they can't look at the stock price everyday but were very conscious of it and for US I think the more important factor is long term strategic fit.

Yes, we always want to realize valuation sensitive.

But more importantly, we want to find the right target strategically and when we do that in the long term, we win and our shareholders win. So that's really what we're focused on I don't know if you said this Dave.

If you did I apologize for repeating but the bright side of increased interest rates as our interest income on our excess cash and so we're sort of at a $1 $2 million run rate right now per year for interest income, which is a nice improvement over where we've been historically so there is a silver lining there.

Okay, Great that's excellent color. Thank you.

Yeah.

Your next question comes from the line of Michael <unk> from Barrington Research. Your line is now open.

Hey, guys.

J J could you give me.

If you've already given and I missed it.

Dot com capex and cash flow from ops.

We haven't.

Yes.

Prepare these for you faithfully every quarter Mike.

Yeah.

Depreciation and amortization to three three.

Stock comp 1.19.

Do you want another one that I didn't prepare cap.

Capex.

Yeah.

<unk> hundred 60 K.

And what with capital and cash flow from ops, if you haven't.

Cash flow Youre, saying free cash flow.

Cash flow from operations before Capex.

773.

735.

Awesome.

I didn't catch zenith have you guys.

Is there anything on cynosure performance during the quarter.

It grew 15% organically, 8% reported.

And what was the actual.

Ported.

The decline in value terms like down five or something like that.

Yes in terms of flat organically reported down six.

Okay.

Just to confirm I think you guys had maybe given it some thought but we're leaning against raising price before your typical sort of first of the year did you guys hold to that or did you guys.

Make some price adjustments.

Since the last call we have not.

<unk> not made price adjustments I think we're sticking to that sort of beginning of year annual okay.

And we didn't.

I felt I felt like we didn't want to overreact to mainly transitory topics.

And then sort of look at we wanted to look at the businesses at a higher level over a longer sweep of time and figure out what makes sense from from that perspective, we're pretty aggressive from a price hike standpoint.

Already and you see that in our corporate presentation getting sort of three four or five 6% a year blended worldwide. So I feel like we are.

That process the cadence of that processes has and will remain the same for this year.

Is it fair to say with inflation and how that sort of hitting everybody that maybe you guys are at.

A little bit more aggressive in terms of pricing at the first of the year right now.

TBD.

We try and buy a lot of nice data to guide us on this topic.

The competitors pricing and market share changes.

<unk> do that by fairly specific geographies.

And we really rely on that it's more of a market will bear topic, and that's sort of what makes sense.

Topic in terms of pricing strategy as opposed to a cost base topic. The cost pieces, obviously come into play, but I would say maybe their consideration number two in the first pieces is what I mentioned sort of.

What's going on in the market.

In terms of it was great color on the sales sales rep number.

In the direct labor number.

You said that the number could move up another six or seven by year end.

The direct labor I mean is $2 13 is that about right or do you need to do any more material hiring there.

I would say that hey, Mike, It's Dave I would say.

2013 is a good level, maybe we could do a little bit more but frankly I think we are.

Sort of nearing near term plateau on that are focused now more frankly than bringing a lot more direct labor employees is is on getting the ones, we have trained up and getting them productive and so.

Yes.

We.

Our our rate of direct labor hiring.

Has been pretty dramatic were up 54% versus a year ago and year to date, we're up 50%. So obviously, we're not expecting anything like that but could it go up a little bit there are still reasons to hire more reps as we need to build inventory to prepare.

Plenty of stock on hand for <unk>.

<unk> transitions and to the extent that supply chain is still difficult.

It's important to be able to have stock available for that so but I would say we've done most of the hiring at this point.

Just sort of the law.

Alas.

The area that I just wanted to ask about it it feels like if I've sort of listening to the comments both on the direct labor and sort of.

Some of the newer hires not being as productive and they're not coming through in gross margin improvement and on the sales side, you sort of alluded to maybe high turnover.

And sort of also sort of talked about well, maybe they are a little less less access and that's causing them to be slower coming up I mean, what it feels like in sort of the numbers sort of suggests especially when you compare to last year all of this hiring hasn't really.

Driven number I understand that the 90 day snapshot against the 90 day snapshot and things may improve meaningfully going forward, but I mean, it's fair to say you havent gotten the bang for the Buck to this point really either.

Sort of hiring initiative either on the sales rep.

Mike I think Thats right I think that's generally directionally right and I think we're trying to say that in a little bit in our prepared remarks, which is we know this is the right <unk>.

Strategy on both counts in sort of the right answer that we're getting too, but we're taking a little bit longer to get for that to translate into results and so youre always trying to say well rep count is up this percent and so organic growth has been increased 6% and that correlation is not always as direct as you want it.

But we know over the sweep of time in the medium term and certainly long term it is and it's the right answer.

And so yes, we got to wait a little bit longer that training for sales reps has been hampered we think by access to hospitals.

<unk> per covered reasons and also maybe for staffing reasons in hospitals.

And maybe some other reasons as well and so and also when you hire quickly maybe you make some mistakes along the way and so some of that is probably gone on as well and maybe there are similar themes in the direct labor piece, but we've done both of these strategies before and we know they've worked well. So we feel confident that this was the right deal.

<unk>.

Okay.

Real quick on the on the sales reps I mean have you guys lost any.

Super productive key reps.

Over the past three to six months.

Just had been difficult to replace a replace effectively.

Mike I.

Of course.

We always we never like to lose a rep I mean, if a rep isn't performing usually they are on our plan.

And so the reps that we do lose we never like to lose them, but this has just been.

Rep turnover is something we've lived with ever since we had sales reps and so have we lost some good ones, yes, probably but it's a bell curve and we've lost some good ones and with lots of non good ones.

It's probably no different than rep turnover in the past, except the numbers are bigger because we have more reps I don't think we sit here and Nash are Keith about Oh gosh that one rep left were really really upset about that I mean, we diversify we're very diversified with 118 sales reps. So we're firing on a 118.

And so.

If one of them besides the lethal that's their prerogative and we will replace that person.

Alright, very good thank you.

Your next question is from the line of Jim Sidoti from Sidoti <unk> Company. Your line is open.

Jim Okay, we hear you.

Now we can okay alright.

Alright.

You cut out just as you say your name I wasn't sure from Louisiana.

You mentioned a little earlier in the call that there was a back order in the quarter.

Is that issue resolved now and we'll get products shipped in the December quarter.

Its getting resolved as we speak and yes, it will be shipping in Q4.

It's you remember omni flow.

Line graphs.

They were transferred here to Burlington in terms of their manufacturing.

And so the startup of that manufacturing process.

There's always a learning curve and it's always a little less efficient that you want it to be so as we started that up.

We created a little bit of a back order, but yes, we're working our way out of it Jim.

Okay, and then it sounds like there is a light at the end of the tunnel with regards to the MPR process.

Do you think that the.

That spending should come down in 2023 and can you just remind us what you spent for that in 2022.

I'll take the first part of that question.

So obviously the MTR spending has ramped over time, it ramped up a little bit earlier for us because we had to change notified bodies for our MDT approvals.

So we started to make investments a year.

To go on that but clearly.

Filing the seven MTR applications at the end of 'twenty one.

And Theres a lot of clinical evaluation report work to develop and dossier development. So it was ramping down and then this year again with another five applications going in by the end of the year I would say, we're if we're not at our plateau, where near it and so.

<unk>.

Yeah.

We hope to start getting approval sometime in the next 12 or 18 months and once you get the approval the spend doesn't go away it declines a lot, but theres an ongoing requirement for clinical data and whatnot, but I would say if we're not at the plateau, we're sort of near it now and.

<unk>.

23 may be is still high but certainly 2024, we would expect that to start to come down until Jim I'm going to I'm going to be a little more cynical about it and I'm going to be like well remember when we had the CE mark issues and we got through we spent a bunch of money and we got through that and then that was replaced with <unk>.

Somebody is going to come up with something new to spend it on.

So I'm going to say, yes, yes, the MTR spend will come down, but I don't know where its going to be replaced with we'll see but you asked about numbers I'll give you the regulatory and clinical spend in the last three quarters, $1 7 million $2 1 million and $2 2 million.

And.

We're not talking about next year, yet so we'll see where all that goes but you can make assumptions from that about up down left right and what percent, but you can get a handle on that now given what the spend was in those three quarters.

Alright, and then.

If we do hit a recession next year based on past recessions Youll do you think any of your product lines are vulnerable or do you think that.

Most of your procedures are pretty recession resistant.

I feel like this one's a little bit controversial I'm more on the were largely non discretionary procedures. If you get a blockage in your leg you got to get it fixed at some point it doesn't have the foots tingling. It doesn't have to be next month or the month after month, maybe four or five months, but it's got to get done at some point.

So all roads lead to a procedure at some point and that typically means you're at the homemade store buying a device to fix that.

And so I would say, yes, they are harping on discretionary, but they do ebb and flow and we saw that with Covid right. We have a weak quarter and there will be pent up demand and then we have a stronger quarter and so I'm going to say that same sort of dynamic could be at work with other topics as we go forward economics or otherwise.

<unk>.

Okay alright, thank you.

Yes.

Thanks, Joe.

Hi, Jonathan.

Alright.

Your next question comes from the line of Scott Henry from Roth Capital. Your line is open.

Thank you good afternoon, and first congratulations to George that's pretty exciting.

I just had a couple of very brief questions.

First when looking at the gross margins obviously, the strong dollar creates a lot of noise there.

And the mix is also a factor.

But when we think about that line going forward, if we think in a constant currency basis.

Should we think about it.

Trending higher or should I think about it more of being between 65%, 70% and bouncing around based on mix just trying to get an idea of how to think about the trend in that line constant currency yes.

Right and so great question. So I guess the first level set piece of this would be year over year FX hurt that that gross margin by 171, 8% something like that so.

We came in was 64, two but really you can add a couple of percent to that.

To put it apples to apples with the prior year, so to the extent that.

The dollar weakens.

You can feel the magnitude of the relief on the gross margin line going forward.

But in terms of where that goes otherwise exclusive of FX going forward, we obviously arent guiding on that at this point. We're just given your Q4, but we have told you conceptually that we think that direct labor.

Team the size of that team increasing is going to help as we move forward and I think in prior calls we've talked about.

Some cost saving topics that could be material in and around cost of sales like shipping of our our zine assure tissue from Australia in sourcing it from Australia versus sourcing it from the U S and can we can we make that switch and have that happen that would save a substantial amount of money and there are some other cost saving pieces that are ongoing.

Going within within cost of sales that could help going forward. So there is a ton of puts and takes in gross margin.

Get into it for hours, but I would say, we're frustrated with the level that we're at and we're going to work hard to improve that going forward, regardless of the FX topic.

Okay, great. Thanks for that color and then some.

A question, but bigger picture I mean, it sounds like 2022 is a pretty heavy investment year, you've added a lot of employees you've added sales reps.

But operating margin is has kind of declined a little which also is hurt by currency.

The question really is would we expect to start to see the leverage from this year's investments.

Would that be I guess more pronounced kind of in first half of 'twenty, three or maybe more of a second half 'twenty three impact just trying to get a sense of when.

When we should expect kind of the payoff from that investment.

Thank you Scott save it's a great question I would say.

Obviously, we're making we're doing this hiring of the deals and the reps and other personnel frankly.

We think they're all good investments and have they paid off yet no not necessarily not as quickly as we would like of course everyone's doing their job and so we appreciate that but we feel like it's taking a little bit longer than we would've thought and so you can see our guidance for Q4.

I'm, a little bit reluctant to get into the timing of what happens next year. If it's COVID-19 taught us anything it's that.

You can make predictions at your own peril, and and so I would say.

Maybe we can maybe we can take a pass on that question, we will be clear I think when we report on Q4 will give you the full year guidance for next year and at that point Youll have a good sense, but right now our focus is to get to.

Work on the productivity of our of our entire team and position us well as we flip the calendar 2023.

Okay, great. Thank you for taking the questions.

Okay.

Next question is from the line of Javier from Zircon from Spartan Capital Securities. Your line is open.

Hello, Dave and J J, Thanks for having me on.

So my congrats to George let me on the on the news and <unk>.

My question is more along the lines of.

On the commercial performance of autograph.

And.

Obviously as was mentioned in previous earnings call.

Management's intent to file for a CE mark in 'twenty three.

This remains the same and also as a quick follow up overall.

Does the growth look for autograph given its impressive commercial performance so far.

Yes so.

An autograph, we do expect to submit the CE Mark the MBR CE application in 2023 at some point.

Not exactly sure when.

Frankly.

It's a biologic product et cetera animal origin, so we'd expect it to take a year or two to get approval. So.

<unk>.

The success, we've had with our to graft in the U S. Obviously, we feel like it's a priority to bring it to Europe and so we're excited about on that submission.

But frankly in terms of building into your model, it's a little ways off in terms of revenue.

In terms of.

The success in asset moves going forward as a topic around units and pricing and Artur grafts, and I would say a lot of them.

Nice growth that we've seen has been pricing so far.

We've been working to move the price of the device more in line with its value within its category.

Devices that it competes in and we think we've done that and Thats put the reps a little bit on the defensive because theyre out there busy defending price hikes from these guys at corporate.

Instead of having time to necessarily go out and get new accounts and I am going to guess, but I don't know that that youre going to see that shift a little bit over time as the.

Is the pricing increases become.

Less less severe I guess I'll say.

A more normalized.

The unit growth hopefully should improve more right and I would add I would just add one other concept to that which is.

As we've been expanding our sales channel and autograft as is.

99% of U S product line currently I think it may be approved in New Zealand, but its a U S product line.

Increase the size of our Americas sales force dramatically and autographed I believe is either the number one or number two product line. They focus on in the bag and has been for some time. So we have a.

A lot of Rep focus on that product line and we continue to be very excited about where it can go.

<unk> historically been focused in the dialysis access space, but our reps are gaining some success expanding out to peripheral vascular uneven trauma. So.

We continue to be very excited about that product line.

Okay.

Excellent and.

That's some great color and I guess my only other question would be on <unk>.

Additional commentary.

Under current FX.

The foreign exchange environment, obviously, it's very difficult to deal with these headwinds continue to predict but are there any measures or or changes going on that would.

Going on to.

To better mitigate this risk going forward of the strengthening dollar yes.

Talking about hedging historically and we've looked into it and we've decided you know what we're not here to be hedging against these topics. We're here to sell medical devices and bring great medical devices to patients and so we've not done that we do feel like we're sort of 50%.

<unk>, 5% hedged generally.

From the topline and the Bottomline. So if the top line is impacted by a 100, let's say the bottom line was impacted by 50.

That's kind of a nice place to be that's part of that international reach that we have.

And it's got a nice built in natural hedge for us and so we've been content with that historically.

Excellent thanks for taking my questions.

Okay.

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].

Good day and welcome to the Lemaitre vascular Incorporated's third quarter 2022 earnings 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.

Good afternoon, and thank you for joining us on our Q3 2022 conference call with me on today's call is our President Dave Roberts, George will made chairman and CEO is unable to be on the call due to the birth of his daughter of last week.

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, the accuracy of which are subject to risks and uncertainties.

Wherever possible, we will try to identify those forward looking statements by using words words, such as believe expect anticipate pursue forecast and similar expressions are.

Forward looking statements are based on our estimates and assumptions as of today October 27th 2022, and should not be relied upon as representing our estimates or views on any subsequent date.

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

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 will mate Dot com.

I'll now turn the call over to Dave Roberts.

Thanks, JJ on today's call I'll cover three topics first Q3 organic sales growth of 7%.

Our continued focus on biologics and third hiring in two key areas.

We posted sales of $39 million in Q3, a 7% organic increase.

Q3 organic growth was led by APAC up 11% and EMEA up 8%.

The Americas was up 6%.

From a product perspective, carotid shunts up 23% are to graft up 12% allograft up 10% and Embolectomy catheters also up 10% drove growth.

<unk> benefited from a competitor exiting Europe due to the more stringent MBR CE requirements, while embolectomy catheters benefited from our competitors back order.

These increases were partially offset by valvular tons, which decreased on a reported basis, but were flat organically.

Biologic devices grew 7% organically in the quarter and represent 50% of our sales.

We continue to invest in new biologics approvals and in Q3, we made two key regulatory filings.

In Germany, we submitted our application for allografts and in Japan, we submitted the carotid indication for <unk>.

We've also recently begun shipping <unk> to Korea, and expect our first direct to hospital sales there in November .

On September 30, we had 558 employees, an increase of 27% year over year.

We focused our hiring in two key areas sales reps and direct labor over.

Over the same period, our sales rep headcount increased by 28% to a record 118.

While direct labor head count increased by 54% to a record 213.

These initiatives should drive sales and profitability in the quarters ahead.

We expect to end the year with 125 sales reps.

That I will turn it over to J J.

Thanks, Dave Q3, 2022 sales were $39 million, an increase of 2% on a reported basis and 7% organically versus Q3 2021.

FX headwinds continue to be substantial and we lost $1 $9 million in sales due to the strengthening dollar in Q3.

For the full year 2022, we estimate that we will grow 9% organically versus 2021, and then lose $6 $4 million in sales due to the strong dollar.

In Q3, 2022, we posted a gross margin of 64, 2% a decrease of 60 basis points versus the prior year quarter.

The strengthening dollar decreased our gross margin by 170 basis points, while unfavorable sales mix was offset by average sales price increases and manufacturing efficiencies.

As Dave mentioned, we've increased the size of our manufacturing team.

This should have a positive impact on our gross margin in the first half of 2023.

Increased direct labor headcount should also increase output and mitigate any potential MTR transition our supply chain issues.

Q3, 2022, operating income was $6 $2 million, reflecting an operating margin of 16%.

Operating expenses increased 20% in Q3, as we continued to hire and invest in many areas, particularly our sales and regulatory departments.

Before year end, we intend to submit MTR CE Mark applications for five additional products building on the seven we submitted in 2021.

Our revised guidance reflects these efforts and shows an 18% operating margin in Q4.

The cash on our balance sheet continues to grow. We ended Q3 2022 was $79 $7 million, an increase of $4 1 million versus Q2, 'twenty, two and $9 $8 million since the beginning of the year the.

The Q3 increase was largely driven by cash from operations of $7 $3 million.

Partially offset by dividends of $2 7 million.

Turning to guidance, we expect Q4 2022 sales of $39 8 million to $42 2 million, which represents a reported increase of 4% at the midpoint and 9% organically.

We also expect operating income of $6 6 million to $8 2 million, which represents a decrease of 11% at the midpoint.

Our Q4 2022, EPS guidance of 24 to <unk> 29 per share implies a midpoint of <unk> <unk> per share and represents a decrease of 5%.

Before opening it up to Q&A I'd like to welcome our newest board member Martha Shelton, who joined US in September .

Martha has over 20 years of life Sciences experience, most recently as president and CEO of <unk> orthopedics and prior to that rotation medical.

She currently serves on the boards of CV Rx and added momentum.

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

As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Your first question comes from the line of Michael Cohen from Jefferies. Your line is open.

Alright, Thanks, Hi, Dave Hi, JJ.

Thanks for taking the question and congrats George on the New addition to the family.

Just had a question on <unk> I think guidance Thats for 10% organic growth and you came in at around 7% do you think you can just talk about what drove the shortfall.

Expectations, and maybe comment on how activity trended throughout the quarter.

Sure.

Thanks for the question Mike.

<unk>.

No one big part of the story, obviously going through everything is FX. These days and so versus when we guided FX hurt us on the top line by more than 100 Grand maybe 125 to 150 K or so so that's a piece of the story.

In value terms had a light quarter.

Quarter as well.

Sort of maybe five or six underground less than we were thinking when we gave guidance.

And I would say that they just want to hit an air pocket in that happens sometimes.

And so it was a light quarter there.

And we also had a little bit of a back order issue with one of our product lines.

In Europe , and that hurt us a little bit as well and I think those were the sort of the topics in and around why we missed the cadence.

Increasing or descending that you could sort of glean from that so I would say.

Yes, it was a little lighter than we thought but still up 7%.

Organically, which is which is pretty much in line with sort of where we've been historically in that seven or 8% growth rate.

Sure. Thank you that's really helpful.

And I guess, just as a follow up.

Can you talk about I guess, how activity has trended through October .

And around the backwater ratio in Europe , I guess I am getting to.

How do you can you talk about your confidence in accelerating from 7% organic 9% in the fourth quarter.

Yes, Mike it's Dave Thanks for the question.

No.

As JJ said, there wasn't really much of.

A pattern that we could glean from the months in in Q3 and for that reason, we're a little bit reluctant to talk about.

Procedures in all of that but suffice it to say that obviously the organic growth rate that we're guiding for is up to 9%. So we're feeling good.

With that I'll take your end.

Of course, one of the topics that we have grown our sales force.

Fairly quickly as we talked about in the prepared remarks, we're up to 118 sales reps, that's up 28% year over year.

And so we're hopeful that as these two months continued to pass these reps will be able to gain more traction.

And they and Thats part of whats, giving us the confidence to increase the organic growth rate in Q4, and then Mike I can give you a little more sort of sequential flux might help you sort of fill in some of the story here Q3 is typically a little bit lighter.

Then Q4, and so as Youre going from Q3 to Q4, and I know you asked about year over year growth rates, but maybe just a little color on how you get from one to the next.

Can expect a nice uptick from seasonality.

The days, we actually have fewer days in Q4 than Q3, so that might hurt us a little bit in FX is going to hurt us a little bit as usual also but we talked about that that valvulotome piece earlier in Q3 kind of guests will have a nice rebound in valvular Charles from Q3 to Q4 that will help us pick up a little a little volume there as well.

Great. Thanks for all the color.

Once again to ask a question. Please press star one on your telephone keypad.

Your next.

Question is from the line of Matt <unk> from Keybanc. Your line is open.

Hey, guys. This is perhaps been on today for that.

Just wanted to follow up on guidance. Thank you just touched on revenue May center around FX and some of the issues around Navajo Tom just looking at margin now.

And it seems like it was definitely.

<unk> down and looks like a local trough for you guys. Just wondering outside of FX, which you quantified what some of the bigger moving pieces, we should be thinking about.

Impacting that sequential decline and then maybe specifically just giving us a sense around how some of the broader macro headwinds around inflation and then supply chain, maybe maybe impacting your near term trends.

Yes, sure. So yes, the gross margin came in weaker than we thought and you can see that.

A piece of that is clearly FX.

And we talked about that I'm going to say two or 3% of the two five.

Delta there is probably FX since when we gave guidance last time, so not not a small part of the answer mix was.

Larger part of the answer, though because valvulotome has come in with a really nice gross margin and so when you have a weaker valvulotome quarter, you do feel that in the gross margin and so mix in total maybe was <unk>, 8% or a third ish of that Delta that we're talking about and Valvulotome is where a big piece of that and.

Then on the manufacturing side, we probably had a little bit more inventory write offs or.

Yield topics or scrap topics in terms of inventory.

Then we've had typically and so that was a piece of the story and then the high level piece.

What Dave talked about a little bit I think earlier.

Which is the direct labor piece is an important part of our story going forward on the gross margin line and they probably I probably thought they were going to get a little more efficient in a little more quickly we've done a lot of hiring.

And you got a higher and we've got a bit of inventory more and then you've got to get them trained and.

And so given the number of folks that we've gotten in the door I think it's taken a little bit longer to get them trained and efficient than than I had thought and so I think thats dragged down our gross margin answer in Q3 versus guidance.

Alright, Thats really helpful.

Sounds like some of those moving pieces or it could be more short term short term in nature.

Then just thinking about some of the longer term initiatives that you guys have in place on the kind of it kind of feels like you may be accelerating some of the investments just given.

Your Rep count already.

The levels you were talking about for exiting the year you are talking about like increasing the number of MTR submission because well have become international product approvals.

Why is it why is now the right time.

And it was it planned or does it feel like you might be pushing forward a little bit faster.

Brett It's a good question, obviously with MTR there is a timetable on that.

The last day, we can ship MDT products to Europe is in May 2024 last day, we can sell them in Europe as May 2025. So.

The good news on MTR is we're right on glide slope, we're feeling good about we've obviously submitted seven MTR applications.

At the end of last year and this year within the next couple of months, we'll submit five more I think that will just like one or two in.

In 2023, so we're feeling really good about that I think that explains the timing of the regulatory spend which is always plan.

In terms of the sales force expansion I would say for years and years. This has been a real.

Solid.

<unk>.

For La made investing I think it's maybe the principal asset of the company.

So as I mentioned, we do expect to get to 125 by the end of the year at the moment.

When we get to 125.

A typical law made on average one eight territory in terms of sales will be about one point to $5 million.

Of course, often in med Tech, we hear sort of the $1 million million dollar territory. So we feel like there are a lot of geographies a lot of territories, where we could still expand we do hear many instances, where our reps are unable to get to cases for example, allografts because it's too far away in their territory.

So shrinking territory size will help address that and frankly I think that will also be a positive for our sales reps. The more reps, we have the smaller territories become the more interesting I think the job is the more appealing and that should be good in terms of retained hiring and retaining sales reps.

And I'll add to two other concepts about why now one is as we went through Covid, we cut back pretty sharply.

On the head count in all areas probably to sharply.

And so that rebound in hiring took a little time to get going and I think we decided that this year. It really the organization really needed to fill in and a lot of areas not just reps in deals.

In this sense operationally that we haven't had one for a year or two so maybe it's a good time that the reps don't have to focus on a new device necessarily and we can we can we can sort of focus on building that rep team and so maybe that was a good time as well.

Alright, thanks, very much guys I appreciate it.

Your next question comes from the line of Brooks O'neil from Lake Street Capital markets. Your line is open.

Good afternoon, everyone.

Obviously, the cash buildup is notable and.

J J just mentioned acquisitions. So just curious how you guys are thinking about capital allocation now.

Investing heavily in the business maybe it is a good time to be.

Out there and what's the acquisition environment looking like David now.

Yes, Thanks Brooks good to hear your voice.

So obviously.

Our focus is to generate cash returned to operating leverage and as we do generate cash.

Probably from my perspective, allocating cash to acquisitions is has been a successful strategy for will make for a longtime I would say after that of course is our dividend. We are in this dividend achievers index, and we're very proud of that and it signals our commitment to ongoing profitability.

Then there are other cash needs smaller like Capex, and maybe acquiring distributors and whatnot, but on the acquisitions front, yes, it's Ben.

Two two and a half years since we've done an acquisition.

And.

We are definitely out there.

Looking at targets, we have taken a run at one or two in the last many months don't have anything to report at the moment, but the pipeline looks good of course. The criteria is generally the same which was looking for products with minimally five or $10 million of revenues in open vascular surgery.

Although we do look a little bit at Endovascular in cardiac surgery, we derive about 10 or 12% of our sales in cardiac now on another really important piece of it is.

The niche low rivalry aspect, where we'd like to be number one or number two in our space. So I would say we're on the hunt and we've got a really solid team, who I worked with on it and.

The cash balance builds of course, it gives us greater optionality.

To do larger deals so.

We are out there hunting valuations are down of course, a little bit with IHI down 26% year to date et cetera, and maybe deal flow has slowed a little bit in general in terms of what the banks are reporting, but yes, we are out there hunting and.

Just like one real estate valuations are down that might be a good time to buy a house, maybe it's a good time to acquire a company at some point.

Absolutely.

I assume the shutdown of the plant in France went about as you guys expected.

Yeah, I think it has.

It's a whole dance on a whole process over there.

And there's all sorts of legal formalities that you got to make sure you work your way through over in France, but yes.

The building is shot and actually sold we recently sold that building so.

We are darn manufacturing over in southern France, we're still negotiating with a few.

Call it a handful of folks on severance, but we.

We feel like that $3 $1 million number we gave you last quarters kind of going to be about the right answer and just to add.

Cool, Thank you and J J mentioned, the Bell <unk> weakness.

You guys just think that's kind of.

The ongoing ebbs and flows of the business, there's nothing you'd point to that would suggest any change in the underlying market for those yes, I don't see anything.

Really in value terms in particular that would lead you to say there is some systemic topic there.

Felt like an air pocket to me.

In the quarter and they happen every once in a while.

And then a rebound is a franchise that has been around obviously with this company since the very beginning of time it remains.

An important part of our portfolio and its performed well.

Over the sweep of time and more recently as well so there may be broader topics in different geographies in terms of case procedures.

Staffing at hospitals, maybe some COVID-19 topics and.

Different geographies.

Remember, 40% plus of our sales are not in the U S.

<unk> can sort of swing around and get you from time to time, but.

By and large the sort of mutual fund approach of products has served us well in this case about the terms.

We did take a little dip but.

I think thats, not a topic necessarily going forward.

Great. Thank you very much for taking my question.

Your next question comes from the line of Rick Wise from Stifel. Your line is now open.

Hi, This is <unk> on the.

I'll call for Rick Wise.

I know that you mentioned on the next quarter that year.

<unk> 118, wraps and you're planning to increase to 125 sales reps this year.

It sounds like this year in general that you are focusing on a lot of hiring I was wondering whether any of the macro pressures have affected.

Your decision in hiring at least the rate of which youre hiring and how this might proceed going into 2023.

And then additionally, I was wondering whether you could elaborate on where you might be like underrepresented edge.

Salesforce geography Lee.

And then ball parking do you have an idea about where you might want to be in 2023 as of March.

Sure sales force head count.

Yeah, Hi, <unk>, it's Dave great questions.

In terms of the macro of course, we've all been reading in the headlines for months and months and months how difficult. It is to hire and there are a.

A lot of people are switching jobs, I'd say la mate has not been immune to that.

We've done a lot of hiring however, we've had high turnover in the sales force I would say a little bit and in our Dl, even though from a companywide standpoint, our voluntary turnover here in Burlington is five or 6% below the benchmark, but sales rep.

Turnover has been something we've lived with for a long time, so I think part of R. R.

<unk> response is to is to hire more reps.

Expecting that there will be a certain amount of turnover so that the turnover dose effect or the number of reps, we hire and the cadence.

And another piece of the macro that effects, our reps and frankly their ability to gain traction is with <unk> since COVID-19.

Our reps have had less access either to the operating room or the physicians of course, it's gotten better and Covid itself of course has gotten a lot better theres still isolated countries like Japan, or maybe cities in China, but by and large the hospitals and Oss are open, but but the rep access is limited so.

With our reps, who do a fair amount of on the job training I think I think that that COVID-19 that rep access limitation has maybe slowed their training.

A little bit so and in terms of.

Might be missing a question, but you were asking where are we well represented in underrepresented we've been doing a lot of hiring in the U S and frankly in part due to the Arctic graft, which has just been.

A very solid acquisition and we keep hiring sales reps to promote that product.

I would say if you look around the world regionally of course, China is the second largest medical device market in the world will only have two or three sales reps there, but we have a limited number of approvals. There Korea. We just went direct there earlier this year and we are.

One sales rep on the ground, we haven't sold a product yet in Korea, but we expect to hear in the next month or two and then we should be able to add reps. There. So I'd say at a high level, maybe APAC is a little bit under represented for US and then and then we want to expand in the U S continue expanding in the U S is.

Well.

Great that makes sense. Thanks, and then I have one more question.

Virtually every company that we've heard from so far it has discussed how macro pressures have affected their business performance.

Do you see the macro pressures stabilizing or even improving.

Oh, that's an interesting one.

I think again for US you got to look by geography.

And so.

In the U S.

It feels.

Like maybe it could improve a little bit.

In the UK, we heard the stories about there being blood shortages and so maybe there is.

A little bit of outsized improvement there potentially.

Think of Japan that had a COVID-19 lockdown topic fairly recently and so there is there's been pressure there, even though our zena share product lines doing very well.

Japan, maybe from a macro perspective, theres room to breathe, a little bit more in Japan as they get out of Lockdowns. So it's really.

Most country by country to answer that but maybe those are some of the highlights.

Great Okay.

One last one from me.

So I know that interest rates are obviously, increasing.

How do you see this affecting like your business decisions and decisions at potential M&A candidates going forward.

And just to tie it into I think you said last quarter.

Your evaluations on today when it comes to M&A.

Are you seeing it that those evaluations are finally coming down are they coming towards your sweet spot and then.

When do you think that might be the case.

Yes.

Hard to.

In terms of interest rates rising I would say.

To the extent that we use debt to fund acquisitions or order of operations is to use cash on hand, first and we probably have $50 million to $60 million of cash on hand that we could use a certain amount of working capital, but then secondly.

Market in terms of.

Med tech valuations going up or down, but clearly they are heading down and I would say as a rule public company owners.

Potential carve out targets are probably theyre getting the email sooner than private company owners, who may be reluctant to admit their business is worth less because they can't look at the stock price every day, but we're very conscious of it and for US I think the more important factor is long term strategic fit.

And yes, we always want to realize valuation sensitive.

More importantly, we want to find the right target strategically and when we do that in the long term, we win and our shareholders. So that's really what we're focused on I don't know if you said this.

I apologize for repeating but the bright side of increased interest rates as our interest income on our excess cash and so we're sort of at a $1 $2 million run rate right now per year for interest income, which is a nice improvement over where we've been historically so there is a silver lining there.

Okay, Great that's excellent color. Thank you.

Yeah.

Your next question comes from the line of Michael <unk> from Barrington Research. Your line is now open.

Hey, guys.

J J could you give me.

If you've already given and I missed it.

Stock comp Capex and cash flow from ops.

If you haven't.

Yes.

Are these for you faithfully every quarter Mike.

Depreciation and amortization to three three.

Stock comp 1.19.

Do you want another one that I didn't prepare.

Capex.

460 K.

And what with capital and cash flow from ops, if you haven't.

Cash flow Youre, saying free cash flow.

No cash flow from operations before Capex.

773.

Yeah.

735.

Awesome.

I didn't catch <unk> have you guys disclosed anything on cynosure performance during the quarter.

It grew 15% organically, 8% reported.

And what was the actual.

Reported.

Decline in value terms like down five or something like that.

Yes that sounds right.

Flat organically.

Ported down six.

Okay.

Okay, and just to confirm I think you guys had maybe given it some thought but we're leaning against raising price before your typical sort of first of the year did you guys hold for that or did you guys.

Make some price adjustments.

Since the last call we have not made price adjustments. So I think we're sticking to that sort of beginning of year annual event.

And we Didnt I don't know.

Felt like we didn't want to overreact to mainly transitory topics.

And then sort of look that we wanted to look at the businesses at a higher level over a longer sweep of time and figure out what makes sense from from that perspective.

We're pretty aggressive from a price hike standpoint.

<unk> already and you see that in our corporate presentation getting sort of three four or five 6% a year blended worldwide. So I feel like that process. The cadence of that processes has and will remain the same for this year.

Is it fair to say with inflation and how that sort of hitting everybody that maybe you guys are.

Or a little bit more aggressive in terms of pricing at the first of the year right now.

<unk>.

We buy we try and buy a lot of nice data to guide us on this topic.

Is that the competitors pricing and market share changes.

And do that by fairly specific geographies.

And we really rely on that and it's more of a market will bear topic, and that's sort of what makes sense.

What's going on in the market.

In terms of it was great color on that.

The sales sales reps number a number in the direct labor number.

He said that the number could move up another six or seven by year end.

The direct labor I mean is $2 13 is that about right or do you need to do any more material hiring there.

I would say that hey, Mike, It's Dave I would say.

2013 is a good level, maybe we could do a little bit more but frankly I think.

We're sort of nearing near term plateau on that are focused now more frankly than bringing a lot more direct labor employees is is I'm getting the ones, we have trained up and getting them productive and so.

Yes.

Our Rx our rate of direct labor hiring.

<unk> has been pretty dramatic.

54% versus a year ago and year to date, we're up 50%. So obviously, we're not expecting anything like that but could it go up a little bit there are still reasons to hire more reps as we need to build inventory to.

To prepare to have plenty of stock on hand for <unk>.

<unk> transitions and to the extent that supply chain is still difficult.

It's important to be able to have stock available for that so but I would say we've done most of the hiring at this point.

Just sort of the WAF.

The area that I just wanted to ask about it it feels like if I've sort of listening to the comments both on the direct labor and sort of.

Some of the newer hires not being as productive and they're not coming through gross margin improvement and on the sales side, you sort of alluded to maybe high turnover.

And sort of also sort of talked about well, maybe they are a little life less access and that's causing them to be slower coming up I mean, what it feels like in sort of the the numbers sort of suggests especially when you compare to last year. All this hiring hasn't really.

You know sort of hiring initiative either on the on the sales rep.

Mike I think Thats right I think that's generally directionally right and I think we were trying to say that in a little bit in our prepared remarks, which is we know this is the right.

Our strategy on both counts.

The right answer that we're getting too, but we've taken a little bit longer to get for that to translate into results and so youre always trying to say well rep count is up this percent and so organic growth has been increased 6% and that correlation is not always as direct as you want it but we know over the sweep of time in the <unk>.

Medium term and certainly long term it is and it's the right answer.

And so yes, we got to wait a little bit longer that training for sales reps has been hampered we think by access to hospitals.

For Covid reasons, and also maybe for staffing reasons in hospitals.

And then maybe some other reasons as well and so and also when you hire quickly maybe you make some mistakes along the way and so some of that is probably.

One on as well and maybe there are similar themes in the direct labor piece, but we've done both of these.

<unk> before and we know they've worked well so we feel confident that this is the right direction.

Okay.

Real quick on the on the on the sales reps I mean have you guys lost any.

Super productive key reps.

Over the past three to six months.

Just had been difficult to replace a replace effectively.

Mike I of course.

We always we never like to lose a rep I mean, if a rep isn't performing usually they are on our plan.

And so the reps that we do lose we never like to lose them, but this has just been.

Rep turnover is something we've lived with ever since we had sales reps and so have we lost some good ones, yes, probably but it's a bell curve and we've lost some good ones and we lost some non good ones.

It's probably no different than rep turnover in the past, except the numbers are bigger because we have more reps I don't think we sit here and Nash are Keith about Oh gosh that one rep left were really really upset about that I mean, we diversified we're very diversified with 118 sales reps. So we're firing on a 118.

Pistons and so.

If one of them decides to LIBOR, that's their prerogative and we will replace that person.

Alright, very good thank you.

Your next question is from the line of Jim Sidoti from Sidoti <unk> Company. Your line is open.

Jim Okay, we hear you.

Now we can okay sorry.

Alright.

You cut out just as you're saying the name I wasn't sure if in Louisiana.

You mentioned a little earlier in the call that there was a back order in the quarter.

Is that issue resolved now and we'll get products shipped in the December quarter.

Its getting resolved as we speak and yes, it will be shipping in Q4.

It's you remember omni flow.

<unk> grafts.

Our transfer adhere to Burlington in terms of their manufacturing.

And so the startup of that manufacturing process.

There's always a learning curve and it's always a little less efficient that you want it to be so as we started that up.

We created a little bit of a back order, but yes, we are working our way out of it Jim.

Okay, and then it sounds like there is a light at the end of the tunnel with regards to the MPR process.

Do you think that.

That spending should come down in 2023 and can you just remind us what you spent for that in 2022.

I'll take the first part of that question.

So obviously the MTR spending has ramped over time, it ramped up a little bit earlier for us because we had to change notified bodies for MTBE approvals.

So we started to make investments a year or two ago on that but clearly.

With filing the seven MTR applications at the end of 'twenty one.

Yeah.

<unk>.

23, maybe is still high but certainly 2024, we would expect it to start to come down until Jim I'm going to I'm going to be a little more cynical about it and I'm going to be like well remember when we had the CE mark issues and we got to we spent a bunch of money and we got through that and then that was replaced with <unk>.

Somebody is going to come up with something new to spend it on.

So I'm going to say, yes, yes, the MTR spend will come down, but I don't know where its going to be replaced with we'll see but you asked about numbers I'll give you the regulatory and clinical spend the last three quarters, $1 7 million $2 1 million and $2 2 million.

And.

Alright, and then just.

If we do hit a recession next year based on past recessions Youll do you think any of your product lines are vulnerable or do you think that.

Most of your procedures are pretty recession resistant.

I feel like this one is a little bit controversial.

We're largely non discretionary procedures, if you get a blockage in your leg you got to get it fixed at some point it doesn't have to your foots tingling. It doesn't have to be next month or the month after or maybe four or five months, but it's got to get done at some point and so all roads lead to a procedure at some point.

And that typically means you're at the homemade store buying a device to fix that.

And so I would say.

Yes, they are hardly non discretionary, but they do ebb and flow and we saw that with Covid right. We have a weak quarter and there'll be pent up demand and then we have a stronger quarter and so I'm going to say that same sort of dynamic could be at work with other topics as we go forward economics or otherwise.

Okay alright, thank you.

Thanks, Jim.

Gotcha.

Yes.

Your next question comes from the line of Scott Henry from Roth Capital. Your line is open.

Thank you good afternoon, and first congratulations to George that's pretty exciting.

I just had a couple of very brief questions.

First when looking at the gross margins obviously, the strong dollar creates a lot of noise there in.

The mix is also a factor.

But when we think about that line going forward, if we think in a constant currency basis.

Should we think about it.

It trending higher or should I think about it more of being between 65, and 70% and bouncing around based on mix just trying to get an idea of how to think about the trend in that line constant currency yes.

Right and so great question. So I guess the first level set piece of this would be year over year FX hurt that that gross margin by 171, 8% something like that so we came in was 64, two but really you can add a couple of percent to that.

To put it apples to apples with the prior year, so to the extent that.

The dollar weakens.

You can feel the magnitude of the relief on the gross margin line going forward.

But in terms of where that goes.

<unk> is exclusive of FX going forward you know, we obviously are guiding on that at this point, we're just giving your Q4, but we have told you conceptually that we think that direct labor.

Team the size of that team increasing is going to help as we move forward and I think in prior calls we've talked about some cost saving topics that could be material in and around cost of sales like shipping of our our zena sure tissue from Australia in sourcing it from Australia versus sourcing it from the U S.

And can we can we make that switch and have that happen that would save a substantial amount of money and there are some other cost saving pieces that are ongoing within within cost of sales that could help going forward. So there is a ton of puts and takes in gross margin.

Get into it for hours, but I would say, we're frustrated with the level that we're at and we're going to work hard to improve that going forward, regardless of the FX topic.

Okay, great thanks for that color.

Then.

Similar question, but in a bigger picture I mean, it sounds like 2022 is a pretty heavy investment year.

<unk> added a lot of employees you've added sales reps.

<unk>.

But operating margin is has kind of declined a little which also was hurt by currency.

Question really is would we expect to start to see the leverage from this year's investments.

Would that be.

It's more pronounced kind of in first half of 'twenty, three or maybe more of a second half 'twenty three impact just trying to get a sense of.

When we should expect kind of the payoff from that investment.

Thank you Scott, it's a great question I would say.

Obviously, we're making we're doing this hiring of the deals and the reps and other personnel frankly, because we think they're all good investments and have they paid off yet no not necessarily not as quickly as we would like of course, everyone is doing their job.

So we appreciate that but we feel like it.

It's taking a little bit longer than we would've thought and so you can see our guidance for Q4.

Okay.

I'm, a little bit reluctant to get into the timing of what happens next year. If it's COVID-19 taught us anything it's that.

You can make.

Predictions at your own peril, and and so I would say.

Maybe we can maybe we can take a pass on that question, we will be clear I think when we report on Q4, we will give you the full year guidance for next year and at that point Youll have a good sense, but right now our focus is.

<unk>.

To work on the productivity of our of our entire team and position us well as we flip the calendar in 2023.

Okay, great. Thank you for taking the questions.

Okay.

Next question is from the line of Javier <unk> from Spartan Capital Securities. Your line is open.

Yeah.

Hello, Dave and JJ, Thanks for having me on.

So my congrats to George let me on the on the news.

And.

My question is more along the lines of.

On the commercial performance of autograph.

And.

Obviously as was mentioned in the previous earnings call.

Some tend to to focus CE Mark in 'twenty three business.

Business remain the same and also as a quick follow up overall.

How does the growth look for autograph given its impressive commercial performance so far.

Yes so.

An autograph, we do expect to submit the CE Mark the MBR CE application in 2023 at some point.

Not exactly sure when.

Frankly, it's a biologic product et cetera animal origin. So we'd expect it to take a year or two to get approval. So.

With the success, we've had with autograft in the U S. Obviously, we feel like it's a priority to bring it to Europe and so we're excited about that.

That submission, but frankly in terms of building into your model, it's a little ways off in terms of revenue.

In terms of.

The success in <unk>.

It moves going forward as a topic around units and pricing and Artur Kraft and I would say a lot of them.

Nice growth that we've seen has been pricing so far.

We've been working to move the price of the device more in line with its value within its category.

Of devices that it competes in and we think we've done that and Thats put the reps a little bit on the defensive because they are out there busy defending price hikes from these guys at corporate.

Instead of having time to necessarily go out and get new accounts and I am going to guess, but I don't know that that youre going to see that shift a little bit over time as the as the pricing increases become.

Less less severe I guess I'll say more.

A more normalized.

The unit growth hopefully should improve more right and I would add.

I'd just add one other concept to that which is.

As we've been expanding our sales channel an autograft is.

99% of U S product line currently I think it's maybe approved in New Zealand, but it's a U S product line.

Increase the size of our Americas sales force dramatically and Arcograph I believe is either the number one or number two product line. They focus on in the bag and has been for some time. So we have a lot of rep focus on that product line and we continue to be very excited about where it can go.

It's.

Historically been focused in the dialysis access space, but our reps are gaining some success expanding that out to peripheral vascular uneven trauma. So.

We continue to be very excited about that product line.

Yes.

Yeah.

Excellent.

That's some great color and I guess my only other question would be on <unk>.

Additional commentary.

On the current FX.

On the foreign exchange environment, obviously, it's very difficult to deal with these headwinds continue to predict but are there any measures or or changes going on that would.

Youre going on.

To better mitigate this risk going forward of the strengthening dollar yes.

Talking about hedging historically and we've looked into it and we've decided you know what.

Not here to be here.

<unk> against these topics, we're here to sell medical devices and bring great medical devices to patients and so we've not done that we do feel like we're sort of 50% five <unk> percent hedged generally from the topline and the Bottomline. So if the top line is impacted by a 100, let's say in the.

Bottom line was impacted by 50.

That's kind of a nice place to be that's part of that international reach that we have.

And it's got a nice built in natural hedge for us and so we've been content with that historically.

Excellent thanks for taking my questions.

Okay.

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.

Q3 2022 LeMaitre Vascular Inc Earnings Call

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