Q2 2019 Earnings Call

As a reminder, today's call is being recorded at this time I would like to turn the call over to Mr. JJ Pellegrino Chief Financial Officer of Lemaitre vascular. Please go ahead Sir.

Thank you Carmen good afternoon, and thank you for joining us on our Q2 2019 conference call.

With me on today's call is our chairman and CEO , George Lemaitre, and our President Dave Roberts.

Before we begin I'll read our safe Harbor statement today, we will make some forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which are 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 are forward looking statements are based on our estimates and assumptions as of today July 24th 2019, and should not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the costs to 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 numbers as well as operating income and operating income growth expectations, excluding certain one time gains and charges.

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

I'll now turn the call over to George for me. Thanks JJ.

In Q2, we reported record sales of 29.5 million up 9%.

Embolectomy catheters, allografts and polyester graph drove dollar growth in the quarter.

Both the Americas, and Europe had record quarters of growing 9% and 10% respectively.

We are increasing our full year 2019 sales guidance to 10% growth up from 8% at the last call. We're also guiding 17% sales growth for Q3 2019.

The 2018 acquisitions as well as the 2018 sales reps are largely responsible for the 9%, 10% and 9% sales growth rate.

We've reported over the last three quarters.

The syntel in cardio acquisitions of 20 team are running at 8 million in annual sales significantly ahead of pre acquisition results.

The two acquisitions also seem to be causing organic growth in our existing polyester graph and then embolectomy catheters.

Separately as you May recall, we bought the international rights to the true insides valve cut or in 2015.

As a follow up in July we bought the U.S. rights, which we believe could add $600000 to age to sale.

Worldwide. We ended Q2 with 110 sales reps a high watermark. We're also opening more sales offices as we aim to enhance our presence in the larger countries.

In Q1, we opened our new Asia Pac headquarters in Singapore.

In Q2, we opened a sales office in Chandler, Arizona to serve Western U.S. surgeons and hospitals.

And in Q3, we hope to get ahead of Brexit by opening a sales office and warehouse in Hereford, England.

Following the Hereford opening we will have 13 sales offices.

Five in Europe , or in North America, and four in Asia Pac.

On the R&D side in Q2, we launched Xenosure plus.

Xenosure plus is a sticker version of our current patch aimed directly at our main patch competitor.

And an age to 2019, we expect to launch during this year, which is identical to xenosure, but carries us indications for neuro and vinyl.

As you May know, we also that could continue to pursue xenosure approval in the three large Asian markets of China, Japan and Korea.

In China, our clinical trial is now 93% enrolled and we currently expect approval in 2022.

We expect to make another Japanese xenosure filing in September .

And we have received approval and accrete in Korea, though we will await reimbursement specifics.

And finally, our 2018 Australian Xenosure approval has begun to accelerate sales growth in that country.

With that I'll turn it over to JJ.

Thanks, George our Q2 2019 gross margin was 68.9% down 1.4% versus the prior year period.

The decline was driven by the recently acquired lower margin Embolectomy catheter and cardio product line.

The stronger dollar and lower margins in our export sales.

Our gross margin may be range bound for several more quarters, while we execute integration and cost cutting measures typical after our acquisition.

Two of those projects are underway, we have now begun to transfer Omniflow manufacturing from Australia to Burlington.

And we're also transferring the applied medical Embolectomy catheters to Burlington.

We anticipate both transfers to be completed in H. one 2020.

In Q2, 2019 operating income was $5.9 million up 6% from Q2 2018, excluding special items.

The operating margin in the quarter was 20%.

In addition, we are guiding operating income increases of 16% in Q3 and 6% for the full year 2019, excluding special items.

These increases compare favorably to past quarters and market returned to our bottom line growth.

The increased leverage should be driven by solid sales growth and operating expense control.

For Q3 2019 in the full year, we expect operating margins of 19%.

We ended Q2 with $48.2 million in cash an increase of $786000 during the quarter.

The increase was driven by net income of $4.6 million in stock option exercises, which were partially offset by working capital uses and dividends of $3.3 million.

Separately, our board of directors approved an eight and a half and dividend and falling a yield of 1%.

Our Q3, 2019 sales guidance of $27.8 million and $28.6 million represents a year over year increase at the midpoint of 17% on a reported basis and 11% organically.

We also expect Q3 2019 operating income of $5.1 million to $5.6 million, an increase of 16% at the midpoint.

We have increased our full year sales guidance to a $115.5 billion to $116.7 million.

Representing a year over year increase at the midpoint of 10% on a reported basis and 7% organically.

We also expect full year operating income to be $21.5 million to $22.4 million.

An increase of 6% excluding onetime items.

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

Thank you and ladies and gentlemen, if you have a question at this time just press star and the number one key you touched on telephone. If your question has been answered or you wish to remove yourself from the queue Mr. pound key.

[noise].

And our first question is from Rick Weiss Your line from Stifel. Your line is open.

Hi, gentlemen, and drew Ranieri on for Rick Tonight.

Thanks for taking the question.

Just wanted to start off on one thing George you mentioned that the recent acquisitions theyre going above your expectation at expectations and they are actually causing some organic growth in some of your other product categories.

Can you maybe touch on that a little bit more are you seeing the organic growth as more surgeons coming onboard to tell a mate.

Or is this maybe just increasing procedure wallet share with limited customers.

I think it's more the former than the latter through.

And in General you remember the French acquisition was largely about the Dacron in France, and we sell our own brand of Dacron called Albo graph and so we're seeing a really nice I something good happening with allograft and we're ascribing it to what were calling leakage, which is a new word from the acquisition into our I don't know our house brand our house type of Dacron. The same thing happening with Intel Python acquisition. The applied medical devices, we bought those embolectomy catheters and their leaking into our brand of Embolectomy catheters as well so you're getting reported good guy growth from the acquired devices and then you're getting also organic good guy growth in the devices that you already had.

Got it and just to touch on restore slow I think last quarter you were discussing.

The product was a bit challenged but it did improve in April .

And it looks like it continued to improve throughout the second quarter could you just maybe touch on some of the dynamics there of what you saw unfold through the second quarter, how that recovery is progressing.

Restore flow.

And have you have you worked through all the issues at this point.

Okay to cut to the end of your question I sort of think yes, we've got at the end of our issue and that issue at the beginning for US which started very early on after the acquisition was we weren't able to source enough of the long 70 and 80 centimeter.

Could ever vein now we've gotten that behind us I feel like our per our sourcing of these products is now beyond our gifting or granting or.

Whatever you call it you're not allowed to sell them to people, but I think it's beyond that now so we have a nice what they call a tissue bank of tissue is out in Chicago now at our factory.

And you know the thing played out a lot like we thought it would the Salesforce said gosh, we don't have enough product. This is the one place where in back order and so we galvanized the giant effort inside on the vascular and I think it was late January early February where we said Oh My God. We got it done we have enough product and now sales are going up as a result of that.

Let's see what happens next but for the first for the first four and a half months of this new situation. It's been fantastic and drew this is Jay Thats on the sourcing side and then you recall a year ago Q3, we talked about a week restore flow quarter, and we lost a bunch of the original very large customers and I think our organic growth rate of new customers.

Has increased a lot I think it's around 150 or so.

Active customers now up dramatically from where we were when we acquired the product line. So there's a nice healthy topic going on in terms of new customer growth as well, that's helping to get us over that hump, which was on the purchasing side.

Q2 organic growth was 26% in the allograft category.

Great and just one last housekeeping question.

I think I heard you mentioned your sales offices, but.

Did I Miss that you provided an updated salesforce headcount by geography.

I hope I did I didnt give the geography I'm happy to have a 110 onboard right now at the high Watermark 51 in the Americas 43 in Europe , and 16 in Asia Pac a lot of the growth.

It comes and goes but a lot of the growth has been about Europe and Asia Pac.

Great. Thanks, so much for taking the questions.

Thank you.

Thank you.

Our next question is from Jason Mills with Canaccord Genuity. Your line is open.

Hey, George de risk on for Jason can you may all right.

Yes.

Hey, so I want to start first a little bit on guidance and the acquisition. So I know kind of in the past you've mentioned that you know the two recently acquired products are expected to be lumpy going forward. I was wondering if you would first we all talk about the contribution was in the quarter from those products as well as.

Kind of parsing out the differences going forward at least as far as how you're thinking about.

The different contributions from growth in the new guidance for the year, whether it be legacy or the acquired or the new products and where if any of those areas. You think you could see acceleration coming from.

Okay lots of questions in there could you mind, you mind dissecting those questions down with the first question that you want.

Yes, So first one I guess, we'll just be on the acquisitions in the quarter I know, we can break out kind of what the contribution was there was there anything kind of one timers in there.

Second would be.

How you're thinking about growth going forward and where you know.

The majority that growth is going to come from whether it be the acquired products legacy products or new product launches and then third one that one being just which of those those three kind of areas will show any kind of acceleration.

Okay. So I grew up in the first two so the acquisition will add 200 in Q3 and 400 in Q4 and if you want to just the gross number in Q2. The applied acquisition was about a one one and the cardiac was about a 50.

You know 50 K.

Yeah that was what you were asking.

And then to continue on I think also you are asking what is the acquisition.

Is it going to be about organic growth or acquired growth going forward I sort of heard that in there and I would say the guidance is.

10% reported growth for the year and 7% organic so you could say the company's growing 7% for the year and then there's some acquisition there remember in Q4 since we bought those two companies in late Q3, very early Q4, there really isn't that much contribution from acquisitions anymore. It's kind of petered out by then and it's mostly inorganic story in Q4. According to what we see from here.

Okay and then.

I think you mentioned that in the past you've been able to kind of derive growth via.

ASP increases wells kind of volume growth is that is that kind of how you're thinking about it going forward as well.

Another follow up as well.

Right. So I wouldn't I wouldn't be able to guide on that but I would say looking at Q2, the business comes exactly 50% from pricing and 50% from units we did look at that.

The growth the growth of our business was 50% unit, 50% pricing.

Okay, and then maybe one more specific with the CEA. So I know, we kind of start data kind of SCS.

Ron kind of T. car procedures and wonder if you could provide some of your thoughts around.

Well, how you're thinking about competition coming in and really where could affect any of your product lines.

Yeah, I think there's no question in the USA, we're doing great with the Sean product line, but there's no question that is in the area of Shawn's and we'll see how adopted that technology get and how it affects our carotid endarterectomy business. So we Sean and some people that this is a better way of stenting, They say and there's a lot of data coming out and the stock on that company is doing quite well so hasn't affected us yet we'll see what happens next we don't it's hard to out guess, what surgeons are going to do.

All right. Thanks.

Thank you.

Thank you and as a reminder, ladies and gentlemen to ask the question, Yes Press star and unwind.

And our next question is from Joseph Munda with first analysis. Your line is open.

Yeah, Hi, guys Tracy Marshbanks pitching in for Joe here, but he left me some key questions for you.

So.

The first one was on.

Could you quantify biologics as a percent of revenue in the quarter.

Yeah, So biologics for about 35% of sales in the quarter and that's up from about 33% in the prior quarter. Okay. And then the other the other question was was really on gross margin your and your outlook I mean, you touched on it a bit but could you sort of help quantify.

You know where the.

The improved outlook on gross margin is coming from between the.

The integrations and various other operational activities, you're going I guess, so yeah. We're guiding 68 seven for the year and that's up 0.2% from our last guide and most of that increase really Tracy is from.

The beat in Q2, we beat the gross margin a little bit and I would say Q3.

Is typically seasonally.

Probably a little bit better quarter, and you know we might get we might get some good guys from.

From a restore flow we should cranked up production as you know over the last year and some of that makes its way on to the balance sheet and it comes back on to the piano and will still come out of the peanut butter is declining, but we'll still get some of that and maybe there's a mix topic there that helps as well.

Okay noted the a that you launched xeno plus could could you talk a little bit about you have you have any feedback from the market and you know how how that's going and when you when you might have feedback if you don't.

Yes, sure we have a very little but we have some weve done about 10 or 15 cases, everything seems to be going swimmingly. It seems to be the I would say, we're trying to replicate our competitors' product we have our own product, it's kind of we love it and it's the market leader right now, but we have a big competitor, who also was a big chunk of the market and so there's certain seem very happy with it everything's fine and we will see as it rolls out.

Great and last one.

Maybe your thoughts on both as a company your ability and readiness for additional acquisitions.

And do you know if you will that the landscape out there.

That you're facing.

Yeah, Tracy its Dave Roberts.

The ability I think is just as good as it's always been we ended the quarter with 48 million of cash we just did another smallest acquisition.

Couple of weeks ago, but at a very high level on the pipeline looks fall. The strategy remains the same you know we normally do about an acquisition the years. So wear out hunting on valuations are maybe a little bit higher than normal, but they're very situation dependent so.

And we'll always wait until we see the right valuation before we.

Closed the deal.

Alright, thanks very much.

Thanks Tracy.

Thank you.

Our next question comes from Mike Petusky with Barrington Research Your line is open.

Hey, good evening guys.

I may have missed this but did you guys give a growth numbers for xena shore Valvulotomes restore fluff.

I think the only when we give until Pfizer store flow, 26% happy to happy to give you Q2 numbers it.

I think valvulotome, 3% organic or 2% organically, 3% reported and what was the other ones. You know was was low single digits to flat reported.

Like what 2% organic for Xeno yeah.

Yeah.

<unk> to the extent you can speak to.

Sort of a competitive.

Issues any pricing in Zener shores, I mean is there any color you can give around the current state of things there.

Sure and I'm I'm Lucky I, just saw a bunch of market share charge last week. So im is educate them as they could be.

It feels to me like in the U.S., specifically, we continued to do a good job market share wise and that the market down a little bit in the last year and a half and so that might explain some of the the issues. We've had there in Europe , where we don't enjoy as much market share that that's going much better for us and in some ways. We look at Europe and the U.S. right now on Xenosure as a tale of two cities for US it's going great in Europe , the organic growth rate number in Europe is.

I think it's eight or nine for the quarter or something to help me, while we're talking in the U.S. its more like.

One ish I think I mean, it's five or six in Europe , and then one here. So it's very different and we have a much lower market share over in Europe .

In a good way like we have more get more to go and the U.S. you sense I will get into the fortys or so and it's harder to make progress.

Okay pricing you asked about we definitely feel pricing pressure by the various competitors in the U.S. more so than we do in Europe .

So we're out there doing a lot of price competition.

Okay very good and then.

I guess George in terms of the.

You know fairly recent hires of sales reps I know takes a 234 quarters for you guys to really.

Sort of get traction I mean, it feels like probably were still a quarter or two away from from sort of full maturity on that later.

Surge I mean is that a fair way to think about it or or.

Anything you can speak to that yeah. You know we are thinking this call, but now weve seen 9%, 10% and 9% sales growth in the last three quarters. So I'm starting to think like we're feeling it a little bit, but I always feel like it takes I just can sounds crazy, but feels like two years. Once you fill a territory until you really really going and so it takes a long time, we all got to be patient, but I feel like were starting to feel good about it. It just feels good around here. The sales does and you can start to feel it in some of the guidance that we're giving you as well. So yes, I think we started to feel it I think there's still more coming on.

Okay, all right great and then.

One other one other piece about that as in the Americas.

The sales rep ramp really hasn't been.

Dramatic it's kind of been flattish, it's really been more in Europe , and you can kind of feel that in our numbers to Europe feels pretty strong and Europe feels a little bit lighter and maybe there's some correlation there U.S. feels light or human setting the U.S. Phil.

I track on that.

Okay, Great just one more and this is really housekeeping for JJ do you by any chance have the stock based comp and capex for the quarter handy.

Like to like I wrote it down just for you somewhere Oh.

Stock based comp seven RK.

What did you on Capex or DNA.

<unk> Capex eight ft.

And DNA 1.35.

Okay very good. Thanks, Thanks, guys I really appreciate it.

Thanks, Mike.

Thank you and our next question comes from Frank attacking in with Lake Street Capital. Your line is open.

Good afternoon. This is brooks on for Frank.

I'm just curious.

I might have missed some of the commentary or George but.

I would call back a few quarters ago, you kind of stepped away from the tenant 20 growth guidance that you had I think put put up for the company for some time would you say youre ready to declare that lemaitre is back.

Well would you say were still in a period, where you're working aggressively to find the formula to get back to that historical growth number.

Brooks I remember pointedly. This is a big topic I think three or four phone calls ago with you. So I. Appreciate you staying on the topic I think what we learned with the broad intermediate term guidance of what was then 10 20, we learned that interfere with a lot of.

Conversations in one on one room and things like that so I don't know if I'm ever going to go back to this intermediate term whatever it could be whether it's 10 20 or 10 30 or 10 10, I don't know if we're ever going to go back to that longer guide and I think we sort of learned a lesson we should say within ourselves. We just stay within a year and so this year. It's a 10 seven and it feels a lot better than last year felt and I forget I think last year was a five negative too if you adjust out for all the items. So we feel like we're crafting a nice comeback story and it is a 10 seven but I think we feel a little bit gun shy about going beyond the end of 2019 as we just keep figuring out that the future is a lot harder to divine than you think it is so I'm I doubt were going to go back to that type of thing, but maybe who knows the future is uncertain.

Okay, but you're feeling you said and I I'm, just regurgitating, what you'd said, you're feeling a lot better about how the company's position.

Elements, you put together too.

Run the company and the opportunities you see in the marketplace going forward.

Things feel great to me right now and you're seeing it in the guidance with a 10 at the top line, we haven't seen double digit guidance <unk> for a while and you're seeing in the in the the 7% op income growth. So I feel good you're going to you're going to know what I feel based on how we guide because Jayson I spent two days lock in a conference room trying to make sure. We guide correctly, we would do that forever, we're not better or worse than we used to be but we take the guidance really seriously.

No no. It's good it's important and I'm glad things are going a lot better and you're feeling better and that's a really positive thing so keep it up congratulations.

Thanks for the questions Brooks.

Thank you.

And our next question is from Scott Henry with Roth Capital. Your line is open.

Thank you good afternoon looks like great results I just had a couple of questions. Most of mine have been asked but I guess first for restore flow a very strong quarter looks.

It's always a a guesstimate, but it looks like a record quarter for the product line or the question is.

You know sometimes that can be a little lumpy in that product line should should I think about the two Q number going forward or on an absolute basis.

As as a new trajectory or will there still be some lumpiness.

Based on a quarter to quarter confirm for you. There was a question that was at a record core the answer is yes. It was a record quarter and restore flow I agree. This one with the fewer number of customers is a little bit harder for us to understand it's definitely not like the lemaitre valvulotome business with hundreds and hundreds of small customers on this one we have more large customers. Although our model is less reliant on large what we call whales than the model of the company that we bought it from the actual we're still flow company. So I think we sorted out some of it but I agree with you it's a little bit lumpy I don't know what to say about the future for restore flow, except you just had a record quarter. It was up 26% and we've solved the supply issues that were nagging at us for the last two years. So I would say all systems are go around restore flow, let's see what happens next.

We don't break down our guidance by product line, we love. The fact that we're a mutual fund a vascular devices. So we don't try to break down exactly which product is going to do well and not do well for you guys of course, we're looking at that internally a bit.

Okay, great. Thank you for that color and then just one other question on Xenosure is kind of and you know to inching you know right around.

Flat slightly up but you have new products coming on board.

I do think work at a point, where it should start to accelerate in and we should start to think about a sustainable growth, even if they're small numbers going forward or I'm, just trying to get a sense of.

When we come out from that kind of plus or minus a category as far as growth goes.

Right. It is hard to read we agree with you and we feel it again I don't feel comfortable putting any expectations on specific product line.

But I am coming out with a 10% reported and a 7% organic guidance here and so somewhere in there something's going well, but I'd, rather not put that kind of let's let's wait and see and see what happens in Q3, I would say sorry, that's not a very satisfying answer Scott, but that's what we got.

Quite all right well. Thank you for the color and thank you for taking my question.

Thanks, a lot Scott.

Thank you.

Oh.

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.