Q2 2023 LeMaitre Vascular Inc Earnings Call

Okay.

Welcome to the Labeet vascular Q2, 2023 financial results Conference call. As a reminder, today's call is being recorded.

At this time I would like to turn the call over to Mr. J J Pellegrino Chief Financial officer of the meat vascular. Please go ahead Sir.

Okay.

Thank you operator, good afternoon, and thank you for joining us on our Q3 2023 conference call.

Me on today's call is our president Dave Roberts.

Our CEO , George who is not feeling well and will not be on the call.

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 1995, the accuracy of which is subject to risks and uncertainties.

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

Our forward looking statements are based on our estimates and assumptions as of today August one 2023 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 special charges.

A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website Www Dot dot.

Dot com.

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

Thanks, J J E.

Q2 sales grew 19% on a reported basis and 16% organically to a record $51 million.

Well it was spread across all products and geographies.

Our five largest products led the way bovine patches were up 16%.

Toms 18%.

Both on ground and 13%.

Sean 22%.

And allografts, 18%.

By geography, the EMEA was up 26% APAC, 21% in the Americas, 16%.

We continued to benefit from two macro tailwind in the quarter Hospital procedure volumes have remained strong as COVID-19 fears have diminished and this helped drive 7% unit growth.

Also the <unk> CLI trial result may be contributing to valvulotome growth.

This trial demonstrated the superiority of surgical pain bypass over Endovascular intervention as a first line treatment for critical limb ischemia and.

Indeed, valvulotome, it's where the product most responsible for our 9% blended ASP increase in Q2.

We ended the quarter with a record 133 sales reps, 20% more than a year ago in retrospect, our 2022 reps surge seems well time to support our 2023 top line growth.

Plan to end the year with 135 to 140 reps.

Three of those reps will be in Thailand.

Just to open our sales office.

In the next 12 months, we expect high sales of $1 $5 million.

Including Bangkok, we now have sales offices in 13 countries and sell direct to hospitals in 29 countries globally.

Regulatory approvals should also drive international growth.

In Japan, we recently received approval for Xena sure what the carotid indication.

Sales have now begun.

Approved reinsurer with a femoral indication drove growth there for the last three years and your carotid indication may have similar potential.

In China, we expect to receive the insured cardiac approval in 2024 and peripheral approval in 2025.

In Europe , we expect to receive our allograft approval in either Ireland, Germany and 2024.

Finally in Europe , we also expect to file for CE approval of Arctic Raft. This December .

With that I'll turn it over to J J.

Okay.

Thanks, Dave let me start by providing some additional color on sales and.

In Q2, 2023 average selling price increases remained elevated up 9%.

Price increases were driven by valve with homes, where the ASP is up 14% as.

That's what I was shocked and autograft both up 6%.

Biologics also drove sales increasing 23% in the quarter, including newly distributed porcine patch sales of $1 $2 million.

Excluding porcine sales biologic devices grew 14%.

For the full year 2023, we have increased our guidance by $5 $3 million to $195 4 million, which represents 18% organic sales growth.

In Q2, 2023, we posted a gross margin of 64% down.

Down 2% versus the prior year period as the average selling price increases were offset by direct labor inefficiencies as well as unfavorable product mix, including the newly distributed porcine patch sales at a 50% gross margin.

As we move through the back half of the year, we expect to see some improved labor efficiency and are guiding Q3, and Q4 2023 gross margins of 64, 3% and 64, 6% respectively.

Excluding special items operating expenses increased 19% in Q2 23 versus the prior year.

Much of the increase was due to higher selling commissions, which we are happy to pay when sales surpassed quota.

In addition, we continue to invest in our sales team and ended the quarter with 22 more sales reps and three more sales managers versus the prior year.

Regulatory costs were up 35% as we continue working to obtain our MTR CE Mark.

In Q2, 2023 operating income of $9 $5 million was driven largely by higher sales and reflects an operating margin of 19% and an increase of 8% over the prior year, excluding special charges.

Bottom line results have begun to accelerate with year over year operating income growth, excluding special charges of 3% in Q1 eight.

8% in Q2 and.

And an expected 33% in Q3 and 36% in Q4.

H to Bottomline improvement should be driven by strong sales and a slightly improved gross margin for the full year 2023.

<unk> operating margin of 18%.

Cash at the end of Q2, 2023 was $90 2 million, an increase of $9 $2 million versus Q1 2023.

For guidance, please see our business outlook issued in todays press release.

But a few highlights include reported sales growth of 22% in Q3, 23% in Q4, and 21% and the full year.

Organic sales growth of 16% in Q3 <unk>.

17% in Q4 and 18% in the full year.

Reported EPS growth of 24% in Q3.

39% in Q4 and 38% in the full year.

And non-GAAP EPS growth, excluding special charges of 22% and the full year.

For the full year eighteens or wild and we expect to report, 18% organic sales growth, 18% adjusted op income growth and ATM and 18% operating margin.

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

Thank you at this time, we will conduct a question and answer session to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment, while we compile the Q&A roster.

Yeah.

Our first question comes from the line of Matthew Michelle Linn with Keybanc. Your line is open.

Hey, guys. Thanks, so much for taking the questions. It's Brad Fishbein on today for Matt just wanted to start off during the quarter. There was some proposed changes to reimbursement for.

Key cost procedures I'm, just curious if you could touch on limits revenue exposure to open carotid procedures and how you think that change may or may not impact our carotid endarterectomy procedure lines over the long term.

Yeah, Hey, Brian it's Dave.

The MAGE exposure to carotid endarterectomy, if you take carotid shunts and the biologic patches, which are used sometimes in conjunction with shunts tour crowded procedures is around 15% of our sales.

How could it be affected I would say of course, it's the CMS proposal, but it feels like based on the market reaction. It will go through eventually.

When that happens and and the extent of the impact is probably unclear.

Certainly I would expect maybe the T car procedure to be impacted most greatly but in terms of carotid endarterectomy.

Ben the gold standard for decades, it's still is of course interventional is they can't do it they can't do the cut down on the procedure. So the vascular surgeons will probably.

Retreat, a little bit to carotid endarterectomy.

And we'll see how it plays out over time.

Alright, thanks, very much for the color and then just.

Turning to guidance I think the revenue trends are really encouraging.

By capturing a positive environment I guess like the one area.

Potentially nitpick, what would be the gross margin, which.

Which came down a little bit versus last quarter. So just curious if you could provide a little bit more on like what changed incrementally around some of the inefficiencies you were seeing and what what really like improving into the second half there that give us confidence in an element of a step up thanks very much.

No that is the area to nitpick I think you've got that right.

And I think you know we've been working on that for some time.

I would say for the most recent quarter.

Robley say you know the answer.

For the for the lower than expected result, I think is sort of half mix.

Have manufacturing and on the on the mix side.

I think I think the porcine patches the distribution piece did better than we thought and those carry about a 50% gross margin. So that hurt the margin restore flow. The allograft product line also did very well in the quarter and that carries a lower than corporate gross margin as well and so that.

The margin down and then there was a.

Third piece, maybe to call out which is our export sales.

It did very well so sales to geographies sort of where we're not selling direct.

Those generally carry lower than corporate gross margins and I think those sales.

And were quite strong in the quarter.

Half a million dollars or so year over year, So that's a mix piece.

And then from a manufacturing standpoint, I think the high level answer is and I've been saying this for a while so I'm pretty kits.

Yes, embarrassing after a while I'll say, but we've hired a bunch of direct labor folks.

Got them in house, and we've had trouble training them up to be.

<unk> in two respects wanted to be.

Utilized.

Actively and then to be efficient while they're in their seats doing work and we've been working really hard on those two topics over the last quarter.

Quarter, and a half two quarters or so and I feel like I can see some nice answers coming through that haven't gotten through to the P&L, yet and so that answer hasnt come through to the P&L yet.

And as we look forward into the next couple of quarters I think that's the high level story for why it might improve a little bit we didn't improve the margin dramatically over the next two quarters, you know going from 64 to <unk> 64, and a half or so by the by the Q4 time frame.

But I think it will be driven largely by that.

Alright, thanks, so much for the color I appreciate it congrats on the quarter.

Thanks very much.

As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment for our next question.

Our next question comes from the line of Erin <unk> with Lake Street Capital. Your line is open.

Good afternoon, everyone. This is Aaron talked around the line for Brooks Congrats on the print just a couple of things so.

Have you gotten a lot of pushback on the pricing actions, you've taken so far and do.

Do you expect to take more pricing this year and do you think that will.

Hi, Aaron it's Dave.

To hear your voice have we gotten pushback I would say.

A little bit, but not so much.

The price increases we've been able.

Two to get in the market.

Have been spread across a few different product lines, probably the valvular Tom's absolutely mentioned in the prepared remarks.

Getting the most but also.

Crowded Sean specifically in Europe , and then a little bit and Arda graph. These are all just highly differentiated devices that you can't really get anywhere else.

And so.

Yeah of course.

With with some of these price increases.

It's important to have a large sales organization there to support the price increase and we're fortunate that we have that and we expanded it in 'twenty two in advance of sort of the price increases as well as just the overall unit growth in 2023.

As to your question, what we put a price increase in in the back half of the year now we put the price increases and at.

At the beginning of the year. So we're not expecting another one until January one.

Add to that.

The the unit story is a favorable one as you go from Q1 to Q2, I think units grew 6% or so in Q1, 10% or so in Q2.

And so that piece of the story.

It has not been problematic and in fact, it's been favorable but we'll watch it because you know the answer is not always presented to you quickly and easily it comes over time, but I would say between that statistic and the fact that our sales folks have not reported back to us.

Any any big issues around those price hikes, I think I think the asps have gone through surprisingly smoothly.

Great very helpful. And then just a quick follow on so.

Do you expect one sort of specific product line to contribute disproportionately into the second half or do you think the trends that we're currently seeing seeing wall will be sustainable.

As Dave said it was really broad based in Q2 I feel like it was in Q1 as well.

And so there is sort of five or six product lines that really lead the way I expect them to continue to do that that makes sense. If you put it in context with the.

The higher level topics that are driving sales one is the hospital procedures, Dave talked about procedures continuing to be strong maybe driven by hospital staffing and may be driven by folks sort of becoming more comfortable with the COVID-19 topic and are now getting back into do procedures.

The price hike piece, that's been across a number of product lines or calling out valvulotome and shunts, but are to graft and restore flow and patches of seeing nice price hikes as well so that that sort of continues as the year goes on and then.

At a high level beyond that are up 22 reps year over year, we hired a lot of those reps over the last nine months ish call it and theyre starting to become productive and so we would expect those folks to sort of broadly sell the bag as they have been doing.

And maybe even a little bit more efficiently. So we'll see.

Awesome very helpful. Congrats again.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our next question.

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

Good evening guys.

A few questions I guess.

J J.

I guess I'm thinking about one of the companies that you guys are often sort of shows up in our comp for you guys and they sort of work.

Sort of like Ducks sort of pedaling really hard below the surface nothing was happening nothing was happening and then all of a sudden there were sort of putting that putting up like 200 basis points year over year improvements I mean does that is that possible here I mean, I know you've been.

Working on this for a while but I mean could we be seeing that somewhere in 'twenty for second half of 'twenty four something like that where all of this sort of all of a sudden sort of comes together.

Sure. That's a great question, Mike I'd like to think there'd be some some significant improvement at some point, but I've been wrong for a while now as I was alluding to.

So the earlier in the earlier question, but there is a direct labor topic that I think at some point you do get it right and you do get to the place you want to get to and then that actually makes its way through the balance sheet to the P&L and youll find.

Important improvement, we're obviously not signaling that for this year, who knows we'll give you guidance in February obviously for next year, but conceptually there should be some improvement and I guess at some point the other piece to it Mike I guess, maybe two other important pieces. One is we transferred omni flow in cardio Sam as you know to our Burlington facility.

When you do transfers, they're pretty inefficient at first and we're still working through that and so that's we were working hard to get out of the army flow back or do we did that it went from like 470 to 60 Grand or something in Q2, and so we've largely got out of that and Thats great.

But we still are working on efficiency there and that's the same answer with cardio cell and then the third piece that would be a needle mover for you Mike is is quality costs.

Back in the day, they were sort of 3% of sales now theres sort of 6% of sales. So there's a two or 3%.

Tackle to your gross margin just from quality costs and I think those are good answers that we spent money and invested in quality and over time, we will let the sort of sales grow up around those quality resources that we've hired and maybe we get some improvement there. So I think those would be the three pieces.

Alright.

J J, while I've got you before I ask David question do you have cap Capex and stock comp I didn't catch that if you've given it already.

You know I do so too.

<unk> 804 for Capex.

And 1.312 for stock based comp.

Cash flow from ops was 11 nine for the quarter.

Yeah, Yeah, that's right.

Awesome.

So.

Dave I guess just any any.

Any update around the M&A environment.

What youre seeing out there valuations look like.

Sort of pipeline of discussions.

Any any anything you can share.

Yes, well, obviously, our cash pile keeps growing and so I and my team we're out.

Hunting there.

<unk> 25, or 30 targets in open vascular space with more than $5 million of revenue and that sort of the sandbox that we've been playing in.

And so we're in conversations with.

Whole bunch of these over time.

I would say since as sort of a limited pool in the scheme of things. We are looking also a little bit at.

At adjacent spaces, so the adjacent spaces or cardiac surgery may be peripheral endovascular, we like cardiac surgery, because sort of like open vascular.

It's not growing as quickly it's smaller market today, Mike we get about 13% of our revenue actually from cardiac surgery and now that you add.

The porcine patches and so we're hunting their valuations seem to have stabilized.

A little bit recently, so I would say.

Yes.

Hunting and we're aware of the cash balances growing but.

We're also waiting for our pitch, we've known because we've done 24 acquisitions that it's better to wait and do a good one then to pull the trigger and regret it.

And I just wanted to clarify one.

Well Mark I think that you've made in your prepared remarks did you did you say did I hear this right that you were adding you havent, yet, but you would be adding three.

Our sales folks in Thailand, and your expected. This part I'm really unclear about $1 5 million in sales in the back half or in the first 12 months.

So yes in the first 12 months, yes.

We actually have two of the three tie sales reps.

On staff right now and we're adding a third.

Yes, and it's one five and basically we opened the office a couple of days ago, and so it'll be the first full year.

All right very good thanks, guys.

Thanks, Mike.

Yeah.

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.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

[music].