Welcome to the LeMaitre Vascular Q3 2020 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. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thanks Lawrie. Good afternoon and thank you for joining us on our Q3 2020 conference call. With me on today's call are 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 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, October 29th, 2020 and should not be relied upon as representing our estimates of use 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 the 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 EBITDA and non-GAAP outstanding debt. 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 on our website, www.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks, JJ. On today's call, I'll review COVID's the impact on our company as well as Q3 sales and profits. In light of the recent escalation of COVID, we must redouble our commitment to the health and safety of our employees. We now know of 12 employees who have contracted the virus, 10 have recovered and we await word on the most recent cases. In addition to requiring masks and temperature checks, in September, we provided distant sensing watches to all Burlington employees. The watches beep when employees are six feet apart, saving this information for future contact tracing. In Q4, we'll expand this watch program to our three other production facilities and our European headquarters. Perhaps due to these safety measures, we're currently experiencing no manufacturing or logistical issues due to the virus. 95% of our production personnel have remained on campus throughout and approximately 50% of our administrative personnel have returned. While elective surgeries have recovered for now, the job description of a sales rep has changed in the time of corona. Access to hospitals and surgeons' offices has been restricted, visits often require an advanced appointment or invitation and adherence to other safety measures like temperature checks. Like all of us, sales reps have leveraged available email and video technology, but there are limits to this. And with another COVID wave upon us, we expect rep access to continue to be challenged. As to our financial results, we posted sales of $36.4 million in the quarter, up 25% versus Q3 2019. Geographically, sales were up 37% in the Americas, 12% in Asia-Pac, and 6% in Europe. The three recent acquisitions; Artegraft, CardioCell and Eze-Sit, and the return of elective surgery drove growth in Q3. These record sales combined with headcount reductions produced strong bottom-line results. We generated $10 million of op income in Q3, EBITDA of $12.6 million, and EPS of $0.37 a share. With that I'll turn the call over to JJ.

Thanks George. Gross margin in Q3 was 62.3%,, down from 69.3% in Q3 2019. The decrease was driven largely by Artegraft purchase price accounting, as well as manufacturing inefficiencies. We do expect we rebound to 65.5% in Q4 is Artegraft accounting normalized Operating expenses in Q3 were $12.7 million, down 11% versus Q3 2019. The decrease was driven by reduced selling and marketing expenses, down 31% year-over-year. Fewer reps, fewer trade shows, and less traveled drove the decline. Manufacturing transfer costs also declined as the factory integrations of Omniflowii and Syntel are completed in Q2. Operating expenses also benefited from a $470,000 gain on sale of our recently closed Omniflowii manufacturing facility in Australia. It seems like Q3 has an operating expense a low watermark and our guidance reflects this. We reversed COVID-related salary reductions on September 1st and we are cautiously hiring more sales reps. The newly acquired Artegraft product line is performing above expectations and generated $5.4 million in Q3 revenue and $950,000 of operating income. Our Q4 guidance includes the Artegraft sale of $5.6 million and an EPS contribution of $0.05 per share. We ended Q3 2020 with $34.4 million in tax, an increase of $9.3 million versus Q2 2022. The increase was driven by $14.1 million of cash from operations, $2 million from sale of our Australian building, and $1.2 million in stock option exercises. This strong cash generation enabled us to repay $4.5 million of our Artegrafted acquisition debt and we ended the quarter with the debt balance of $16.5 [ph] million. You may recall that we experienced CE Mark issues with some of our devices recently including Dacron grafts and bovine patches. We are pleased to report that in Q3, we received temporary authorizations allowing us to sell the grafts and patches for at least Q4 2020 in 12 European countries. Any impact related to this issue is included in our Q4 guidance. At the midpoint, our Q4 sales guidance represents an increase of 19% versus Q4 2019 and our Q4 operating income guidance represents an increase of 70%. At the midpoint, our Q4 EPS guidance of $0.30 per share represents an increase of 32%. With that, I'll turn it back over to Lawrie for any questions.

Hey, good afternoon, guys. Frank Takkinen on for Brooks this evening. Thanks for taking my questions. Just a couple for you here today. I was hoping you could tease out exactly the bottom end and top end of organic growth assumption. I heard your comment of $5.6 million expected from Artegraft, but I was just hoping you could help us have perfect clarity into kind of what you're thinking of from organic growth perspective for Q4? Sorry, I was on mute there talking to myself.

No problem.

Yes. So, for Q4, I think we think the organic growth is going to be sort of low single-digit negative numbers, maybe 2% or so something like that. So, an improvement from where we've been, but not quite yet positive numbers. And I think the full 19% growth is driven by Artegraft and CardioCell acquisitions. And FX actually helps a bit year-over-year -- Q4 as well by about 1.7%. Got it. And then on the second question, for gross margin, you guys have done a remarkable job of integrating your acquisitions and getting back to your corporate average in the high 60s looks like you're well on your way with your guidance there for Q4. I was just hoping if you could provide us with a little more granular update on where you're at in the process with integrating Artegraft and getting your corporate margins back to where they have historically been for the fourth quarter, as well as anything anecdotally you can talk to into 2021?

Yes, so it's great question Frank. So, , the Artegraft inventory step up piece goes away, probably halfway through Q4. And so if Artegraft costs us 4.5% or almost 5% in gross margin headwinds for this quarter, maybe you get half of that back or so in Q4, and then fully back after that. So that'll be a nice improvement for where we are this quarter. And then going forward, I think, to the extent that we get integrations done and those integrations then start actually coming through the P&L, you'll start to see improvements. And obviously, we haven't guided on this, but the Omniflowii integration was recently completed and the Syntel integration was recently completed. And even those are done operationally, the inventory that we had previously made or purchased at a higher cost still hasn't all been sold out. So, as those sold -- sell out, you'll get an improvement there as well. And so if you never did another acquisition, eventually you'd see us returned to the glory days somewhere around there, if you look back in time, in terms of our gross margins, but I think we've been super active in the last couple of years, maybe five deals in the last couple of years. So, there's a lot of integrating. Two of them are done. One of them is Artegrafted pieces and fall away pretty quickly and so I think that's sort of what it's feeling like going forward.

Got it. Perfect. Thanks for answering my questions and congrats on a solid quarter, especially given the backdrop. Good job.

Thanks Frank.

[Operator Instructions] Your next question is from Rick Wise from Stifel. Your line is open.

Hi, guys. It's Drew Ranieri on for Rick tonight. Thanks for taking the question. First, just wanted to start on the salesforce for a moment. JJ, I think I heard you mentioned that you're potentially going to be hiring or lifting the freeze of hiring for sales reps heading into the back part of the year. But just kind of your thoughts on how we should be thinking about LeMaitre adding sales reps, I think you added some from the Artegraft acquisition and maybe how your guidance contemplates those adds in your in your operating income?

So, Drew, this is George, maybe I take that, it’s a little bit more in my corner here. So, yes, we have started hiring. This is new to us. We have about 12 requisitions up on the board right now. We'll see where we go. Obviously, we're watching closely what's going on in Europe for COVID right now and also in the United States for COVID right now. You just get started hiring and then something changes. So, it is a tough environment to predict where you're going to be in three months. It feels like the last call July 23rd was a million miles from now. But maybe as a band, I'd say we'd be up by five or 10 sales reps by the end of the year.

Okay. And could you -- sorry, I've missed this too. But did you give rep headcount as the third quarter?

Yeah, it was 79.

Got it. And could you be a little bit more precise in terms of geography?

Sure, of course, 35 in North America, 33 in Europe, and 11 in Asia-Pac.

Got it. And then just kind of looking at LeMaitre over the past four or five years, sales rep productivity has held fairly stable, kind of as you look into 2021. I mean, how should investors think about LeMaitre's growth going forward in context of rep productivity, now that the salesforce is roughly 20%, smaller than where you were at the beginning of the year? And the reps you're hiring now, we'll need some time to be productive or to get to productivity levels.

Right. I think the whole question of rep productivity is the heart and soul of this whole thing for our company right now? How much can they get done right now? It's a big question. I don't think we have answers on it at LeMaitre Vascular, because everything's changed for the rep, they have a very difficult time getting into hospitals, ad hoc and into doctor's offices. So, I honestly think that's so far away that I couldn't even put numbers on productivity. I would say we feel somewhat fortunate to have gone through the last six months with sort of employee-light, because we're nervous the reps aren't able to make as much of an impact as they used to. And I'm working on a hypothesis that brand switching in a time where reps can't really get into hospitals has been reduced. It feels like people are going back to their to their safety zones and just using the products they've always used and I think you see that in our Q3 revenues.

Got it. And then just to be to be selfish one last question. Just on the procedure environment, in general, obviously, there's some spikes in cases throughout the world. Just could you talk about what you're seeing so far, maybe in your October trends? And how that might correlate to your 4Q guidance range?

I think the last part of your questions, instructive, what we saw in the first four weeks of October has produced our guidance. Looking at what happened to the summer quarter and then first three or four weeks, but we don't -- I wouldn't go off and talk about them. I think there's enough to talk about here about just the quarter that's closed, rather than digging into October.

Got it. Thanks for taking the questions.

Thanks a lot Drew.

And your next question is from Mike Petusky of Barrington Research. Your line is open.

Hey, good evening guys. So, George I guess I want to ask you sort of a bigger question. A lot of companies are starting to sort of share what they've learned during the past six, seven months of sort of a new normal or trying to adjust to whatever we're calling this un-normal times. Can you just talk about what you feel like you learned during this time in terms of your business. And I mean for roughly three years, you guys kind of had flat earnings and now in the most challenging of times, you're going to sort of break out of that, and most likely show some really nice bottom-line growth. Can you just talk about what you guys have learned and how that all sort of informed the future thing? Thanks.

Sure. And may be a surprise, it might not even be about COVID, I think what we learned is about the Artegraft acquisition and the use of debt and going large. And so I think that's been some of the biggest stuff that we've gotten JJ, Dave, and I have sort of digested for the year is that we need to go a little bit bigger with the acquisitions and I think we're a little bit more comfortable now using some other forms of capital. I think in the past, we've had a very conservative balance sheet. So, maybe that's one of my big lessons of the first nine months. If you're asking specifically about COVID, I would say the world from -- the company's breaking down into two segments right now. It's sales reps and the managers, and then everything else. And I would say, on a positive note, it feels to me like in Burlington here now, I hope there's not going to be some kind of COVID outbreak here. But it feels to me like the game is back on in terms of making medical devices, assuring their quality, having high levels of production, inventory, things like that. And so like all of us in this call, would probably finding some workarounds where we can kind of go do that thing, but we can feel safe about doing that thing. And I feel like in the five buildings in Burlington and I would extend this to the other factories at LeMaitre Vascular, we're getting about -- we're doing our stuff, we're wearing these watches, no one's bumping into each other. And so far knock on wood, we haven’t had any spread inside of the buildings at LeMaitre Vascular, I think there's about eight production buildings around the…

Absolutely. Just one kind of quick follow-up on that subject. So, when you think about just on the sales rep side, I think at one time you guys may have been like 110, 115 reps or 112, some number like that. Can you envision even two years from now being back at that number? Or do you think that sort of what you've possibly learned on that side of things is maybe you don't need that level of salesforce?

Well, remember, we're dealing in so many if then statements right now. And so if you're telling me there's a vaccine coming out in February, and someone's going to be sticking my right shoulder with a vaccine, definitely we will be back there. But if you say it's not going to work, and things are going to drift, I would say well, we'll feel our way towards that. You probably hear from us every three months. I think the bias right now is we're a little bit light at 79 and you're quoting a correct number, high watermark a year ago was 112. And so I would say the bias inside these buildings is we're a little light, which is why to that 79, we're sort of -- we've got 12 requisitions out there and I would say the band is we're trying to add five to 10 right now. Who knows -- some of these guys quit on us, remember, it's not all like we went off and took them all out, we lost eight or nine reps during the summer. One thing that we found reps do during when they can't leave their house, they start job hunting. So, we lost some reps too. It wasn't all something that we wanted to do.

Okay, okay, great. And then just a quick one, I guess for JJ and I may have missed this at the at the outset. But did you guys talk about sort of topline drivers in terms of -- like the big product categories, Valvulotomes, XenoSure, Artegraft, performance then?

We may have touched on it. You want to -- you're thinking year-over-year or are you thinking sequential?

Yes, year-over-year.

So, I mean, year-over-year, I would say, the Artegraft piece is certainly an important part of the equation. Bovine grafts are up $5.3 million or something like that year-over-year, driven by the acquisition. And then the CardioCell acquisition actually helped a lot year-over-year as well reported by maybe $1.08 million something like that. So, that's probably your number two driver. And then Valvulotomes were up pretty sharply as well year-over-year, driven by the high growth, but also the Eze-Sit and price increases related to the Eze-Sit. So, it's been a nice -- another nice acquisition story, really. So, those three acquisition pieces, really helping drive reported sales year-over-year.

What about Valvulotomes' ex-Eze and then Xeno?

I think they were up decently. I can't remember the percent, maybe one of you guys can. But I feel like it was still a nice answer for the face Valvulotomes business?

Mid-single-digits--

Yes, 7% 8%, something like that.

I think it was more, JJ. I think we had a really nice experience. I don't know the exact number. I think we had a really nice experience, particularly in Europe with the LeMaitre Valvulotomes.

Valvulotomes units worldwide were up 9%.

And Xeno?

Is that a question in there? Sorry, we couldn't hear?

Yes, no, I'm sorry. Yes, I may have missed it. But did you give us XenoSure year-over-year?

XenoSure.

Yes, go ahead Dave.

Mike it was flat reported year-over-year, organic was down 2%. And there was a little bit -- the down 2% was a little bit affected by a back order in Europe related to some of those two topics.

And just last quick one. Any update on the XenoSure trial in China? Thanks.

Yes, update on the trial is of a little bit of progress, a little bit of better news on that trial. Because China has cleaned out their COVID problem, the follow-up, which was getting lost, the patients are being lost to follow-up in Q1 and Q2, the patients are now comfortable coming back to the hospital. And as a result, the cardiac trial now needs no more enrollees and is effectively done enrolling. And to give you a high level, look at this, I would say the cardiac side was thinking about approval in 2023. We don't see roadblocks on the way there for the vascular side, which is a different side of the trial. We also have been happily surprised with the follow-up that's starting to occur. We do have a roadblock, we have a 85% chance that we'll be able to work our way around the roadblock. There's a question about the endpoints and about the redoing of the endpoints. So, we'd say 85% chance, yes, in 2024 and 15% chance, no, we will not be allowed to redo our endpoints are the Chinese FDA.

Great. Thank you.

Thanks a lot.

Thanks Mike.

Your next question is from James Sidoti of Sidoti & Company. Your line is open.

Hi, good afternoon. Can you hear me?

Yes, we can.

All right. So, just to be clear, I think he said Artegraft added about $5.4 million in revenue, but the total acquisition revenue was closer to $8 million, does that sound about right?

Yes, you're in the ballpark, total acquisition revenue about $7.6 million.

Okay. And then if you take the $5.4 million, you did this quarter and then you did a couple million in the June quarter, you're looking at about $5.6 million, I think you said for December. So, it sounds like you're thinking that Artegraft is going add $13 million this year? Less than that, a little more than $11 million.

Okay, so it's $5.4 million to-date I guess.

Yes, there's couple of hundred and Q2 is a still stub period. And then $5.6 million, yes.

But if I look at the -- your operating income generated this quarter and versus the interest expense, it sounds like it was a cleanup even in this quarter with the extra cost of goods of goods sold.

Yes. No, it’s a good story, Jim. It's -- on an op income basis, it added almost $1 million. When you got done with taxes and interest expense, it was accretive to a $0.01 a share.

So, I guess Dave can put this one in the win column right away.

He has already got it.

Not quite. But early days.

All right. Then, can you comment at all about the trends, July, August, September, did it get better every month in the quarter?

I can give you those numbers. I'm happy to. Organically down 7% in July, flat in August, and up 1% in September.

Okay. All right. And then the guidance in Q4, I'm impressed, you're given guidance at all with the current situation, but $34 million to $38 million, is the difference between the $34 million and $38 million, what happens in COVID or if there are factors in there?

Yes, there's definitely a COVID topic in there, Jim. And when I say we're thinking about guidance, we were like, okay, do we just still sort of status quo? Or do we assume a second wave? Or do we assume things get better? And I would say we probably erred on more on the conservative side. But we'll see and you don't know how that's going to turn out. And then there's a little bit of a CE Mark issue in there we're trying to figure that out. And then there's a seasonality piece in there. Usually, Q4 is better than Q3, but this this odd year, I think we feel like some of Q2 sales got pushed into Q3. So, there was sort of a nice answer and nicer answer in Q3, maybe that seasonality would suggest. And maybe that means a little lighter seasonally speaking from Q3 to Q4 for guide. So, there was a lot of puts and takes going back and forth, big numbers too in the guidance. And we also talked about not giving guidance, because of all that, but I think at the end of the day, we felt like we'll just give you the best shot we've got. We'll try and figure out what we think it is and let you guys know.

Okay. All right. And you better not tell my wife about that that six-foot watch thing, because she'd buy those in a heartbeat.

Maybe she doesn’t even need it.

All right. Thank you.

Thanks Jim.

And your next question is from Scott Henry of ROTH Capital. Your line is open.

Thank you and good afternoon. Just a couple questions. You may have hit on them already, but my apologies if so. First, could you give revenue in the quarter for biologic -- first non-biologic, just keeping the big categories?

Sure. So, Scott, the biologics and disclosure were 48% of revenue.

Okay, perfect. And Q3 upside relative to your expectations, where was that from? Aside to your original guidance?

Right. It was -- I think the guidance was 32.5, Scott, which is probably what you're getting at and we want to come in at 36, 36.4. And so it was a big Delta. I think, if you think back to July 23rd, again, it's so long ago, that we were still coming out of a very scary place for the company and we didn't know what the summer was going to look like and we figured we'd give some guidance or we'd a big wide range. One of the concrete things that did better than expected though was we've alluded to it couple of times in the call already, but we got these what are called derogations in Europe for the CE Mark, which is each individual country allowed us to place our stuff on the market even without CE Mark. And so we sort of did a save of about 90% of the problem we had anticipated going into the quarter with on that stuff. And I don't know in the end how much that I'm getting it for us, but it was an awful lot. So, things worked out a lot better on that front. The Artegraft, I think was I don't know, like 10% better than plan, it was like $400,000 more than plan and so there's another $400,000 there. And then honestly, it was it was just the COVID, the doctors and the patient got back to it a lot more than we expected as of July 23rd. And we didn't know they were going to be rushing back to the hospitals and getting their work done. I think that's the foundation of the -- in a good way the miss on the guidance.

Okay, that's good color. Thank you. And then the final question. When we think about organic growth, it was negative in the quarter and how should we think about it going forward, recognizing that that I think there are two variables here, obviously, the COVID-19, but also the lower sales and marketing. So, if you had the same number of reps, do you think organic would be positive? I'm just trying to think about where we would get to some sort of normalized organic growth rate?

I got to say, I'm going to take the COVID answer on this one Scott. And I just feel like we're so in the middle of something we don't know about. Real quickly, I just went and I peruse like six or seven earning statements from some of the big guys and some of the guys next to us and it doesn't feel like anyone's producing any growth right now with some very notable exceptions like Penumbra. So, I would say no one knows whether the organic growth is bad because of COVID or whether it's bad because LeMaitre doesn't have 15 extra sales reps. So, I think if -- the answer is too deep and too complex to even get at.

Okay. Well, I appreciate you giving some color around the variables and thank you for taking the question.

Thanks a lot, Scott.

And ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect. Have a great day.