Welcome to the LeMaitre Vascular Q2 2021 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 LeMaitre Vascular. Please go ahead, sir.

Good afternoon, and thank you for joining us on our Q2 2021 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. However possible, we will try to identify those forward-looking statements by using words such as belief, expect, anticipate, pursue, forecast, and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, July 29, 2021, 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 EBITDA and non-GAAP outstanding debt. A reconciliation of GAAP to non-GAAP measures is discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks, J.J. On today's call, I'll cover three topics; #1, COVID's impact on our employees; #2, record Q2 sales; and finally, #3, rebuilding our sales force. First, I'd like to review COVID impact on our team. 38 employees have been infected since the pandemic began with all now recovered. Thanks to the availability of vaccines, our U.S. and U.K. staff returned to the office on June 21st and our EU and Canadian staff did the same on July 26st, and we continue to observe health and safety measures in our facilities. We posted record sales of $40.7 million in Q2, up 64% versus the COVID affected Q2 2020. Sales grew 83% in the Americas, 36% in EMEA, and 30% in APAC. By product, Artegraft sales were $6.7 million in Q2, and over several records with valvulotomes, carotid shunts, carotid patches, and allografts. APAC benefited in Q2 from $250,000 of Japanese XenoSure sales and we expect to submit XenoSure trial results to the Chinese FDA by October. Chinese XenoSure approval is likely in 2023 or 2024. We ended Q2 with 88 sales reps. Despite 27 open requisitions, sales rep powering has been slow. We intend to return to our pre-COVID high watermark of 112 reps. Meanwhile, we're expanding our warehouses in England, Italy, and Japan, in order to improve customer connections and speed up order fulfillment. By October, we'll be shipping from our warehouses to hospitals in 8 of our 9 largest markets. With that, I'll turn the call over to J.J.

Thanks, George. Our Q2 2021 gross margin was 65.8%, a decrease of 2.7% over the prior year period. The decrease was driven by changes in product mix, manufacturing inefficiencies related to our 2020 personnel reductions, and inventory write-downs, largely from our TRIVEX product line. We are currently rehiring manufacturing personnel, which should bring manufacturing efficiencies in the coming quarters. We posted operating income of $11.1 million in Q2 2021, more than 1/3 of which was contributed by Artegraft. Operating income was also up due to restrained headcount growth. We ended Q2 2021 with 417 full-time employees, including 88 sales reps, compared to pre-COVID 2019 levels of 454 and 112, respectively. In Q2 2021, our operating margin was 27%. Cash flow is also improving. EBITDA of $13.3 million was up 108% year-over-year. We ended Q2 2021 with $23 million of debt and $21.8 million of cash and investments. Since the June 2020 Artegraft acquisition, we have paid down $42 million of debt from internally generated cash. And last week, we retired the remaining $23 million with proceeds from our recent $54 million stock offering. We continue to maintain our $25 million untapped revolving line of credit. Improved profitability and cash flow have increased our access to debt and equity capital markets. Turning to guidance. For the full year 2021, our sales guidance of $154.1 to $158.1 million represents an increase of 21% at the midpoint versus the full year of 2020. And our operating income guidance of $37.7 million to $40.4 million represents an increase of 36%. Our full-year 2021 EPS guidance of $1.30 to $1.40 per share represents an increase of 30% at the midpoint. With that, I'll turn it back over to the operator for Q&A.

[Operator Instructions] Though we have our first question from Rick Wise.

Maybe we could dig into a couple of topics. I mean, obviously, it's great to see the strong quarterly finish. And you've given us very specific guidance ranges for the third and fourth quarter, thank you. It makes it easier. Maybe just as coming out of the second quarter, you could help us think about trends and momentum. Obviously, it's not surprising to imagine that the third quarter would be slightly seasonally slower, but have trends basically continued have you seen any impact of COVID? Just in general, what are you seeing big picture out there and how do you feel like you're set up for the third quarter?

Rick, this is George. Thanks for the great question. So I'm going to limit my comments, if that's okay, to Q2. I really don't want to get into what's going on in Q3 already. But as a comment that gets truncated at June 30th, it was a really strong quarter, and we could feel the customers taking the products away from us during the quarter and we're not trying to take any great credit. I think they've been waiting, and a lot of these procedures got backlogged and we felt that in Q2. The big guessing game, I think around our company and medical device companies in general, would be as you look at Q3 how does that continue, if it continues, or does it sort of play out in Europe a little bit more than it plays out in the U.S. maybe it's exhausted in the U.S. Those are unanswered questions for us. But in Q2, we definitely felt it and we'll take a cautious wait and see approach to Q3 and see what happens. And then it's how much to people take vacations as well in Q3. Do people feel like particularly the European, hey, we're out of vacation after all of this time, or they say, no, I want to go back and do my procedures and we'll push the vacations into some other time. I don't know the answer to the question. But we did our best with our guidance to try to answer those questions inside of our guidance.

And maybe this is more for J.J. George talked about the U.K. staffing in Canadian sat back facilities, you're talking about hiring. If I understood you, the manufacturing folks and my sense is you seem to close manufacturing efficiencies. Just how do we think about the potential positive impact of all that, maybe lower cost and getting ever back on-site more manufacturing personnel doing something that helps? How do we think about margins, the impact on margins going forward?

So maybe the first piece of it is in Q1 and Q2, Rick, you got some extra excess and obsolete inventory write-downs from product lines that aren't doing well or that we're sort of exiting or just sort of struggling a little bit and I think those abate for the second half of the year, and so maybe there's a little help there moving forward. Seasonally, Q3 is typically a little bit better for gross margins oddly as well, so maybe again a little help there in Q3. And then in terms of the direct labor folks, we did lay off a bunch of folks for enduring COVID along with the other layoffs that we made, those inefficiencies are coming through now. And I feel like as you get into Q4, you start to run away from those, and we've been working to hire more direct flavor folks over the last months and maybe you get a benefit from those sort of as you move forward. So it's a combination of all those things. And I think the other piece of it may be, Rick, is Artegraft been doing really well and Artegraft has a nice strong gross margin. And so to the extent that we continue to see strong quarterly numbers from Artegraft that will help the margin as well.

And maybe just last for me. It's given the much strength in balance sheet, the greater financial flexibility, your strong cash flow. It's always hard I mean, somebody has to ask it, I'll take the fall. Maybe Mr. Roberts could discuss the M&A pipeline and just does this set the stage for even more activities, just any update, any color there, Dave?

Yes, I mean, obviously, we're very pleased with that equity offering. It was nice to pay off the debt, save a little bit of interest, have a clean balance sheet optically for potential sellers, and just frankly, to have more dry powder. In terms of the pipeline itself, I would say, during COVID, it did restrict travel a little bit. A lot of the congresses had shut down. We're seeing them starting to open a little bit and travel is picking up a little bit. So we are pursuing various targets. I think maybe an object lesson from the Artegraft acquisition a little over a year ago was for us to be considering larger targets. Artegraft is going very well, obviously, as you can tell. And also to borrow money we've got a lot of EBITDA, we could leverage that. So we are looking at larger targets these days. I would say our focus hasn't really shifted, we're still focused really on disposables and implantables used by vascular surgeons. Maybe branching out a little bit into endovascular or cardiac surgery, but we like the niche markets and we can look a little bit larger. So we just wanted to be prepared for that and we'll see when a willing seller that meets all of the strategic criteria shows up we will be ready for if and when that time comes.

[Operator Instructions] We have our next question from Matthew Mishan.

Just on the second half look here. I understand not wanting to give too much color around phasing in 3Q and 4Q and some of the caution here. I guess, why would 4Q not be better than 2Q, given where we're at today?

And you're talking about sales or you talking about up income?

Yes, sales.

Okay, sorry. And you're looking at sequentially from Q3 to Q4 or from...

Yes, Q2 to Q3. Q2 to -- I can understand like Q3, we're still a little bit of a gray area there. No one really kind of -- people won't share what people do in the summer. But I guess Q4 seems like it should be a little bit stronger than what you have implied in your -- or what you have put out there for your guidance?

Matt, it's Dave. Good to hear your voice. Thanks for the question. I'll start it and then George or J. J. may add in. But Q2 was a unique quarter for us, particularly in the United States. What we saw what well felt here in the U.S. was the COVID pandemic, maybe lessening a little bit. We believe we did feel a backlog of cases come through, which is why we saw such widespread growth among our product lines, so many different products setting records. I think it was unprecedented. But now with the Delta variant and we're hearing about elective surgeries at some hospitals in the Southeast shutting down and it's just Q3, and then of course, we know that COVID likes the cold weather, it's really -- we have to be a little bit cautious as we think about how to sequence in Q3 and in Q4. So, that certainly was a consideration, but I'll open it up to either George or J.J. if they want to add.

Quick FX topic as well. So a pretty European business and we'll lose about $200,000 of sales going from Q3 to Q2. There's the CE marking thing, Matt. There's a little nuance here. So, while we were thrilled and we wrote a press release on May 25th to get those 5 CE marks, we have continued to put the message out there that there is 2 of the products that they approved name and the more important one being XenoSure. They have proved a device that we weren't making before the actual approval. They proved a device that had 4 years and a slightly different IFU, etcetera, etcetera, a long story, but we had to start making the product all from new. And so we were selling oddly and ironically, we're selling under derogation before May 25th. And then as of May 25th, you couldn't do that anymore in most markets. And so post-May 25th, for XenoSure, in Europe, you should expect some struggles. So maybe that links up a little bit. And then I would say, we're trying to figure out, my final point would be, so FX, the CE marks, not really in Q3 being a great thing, but coming back in Q4, we should be fine in Q4 for all the CE issues. But -- and so I'd say those are 2 big issues. And then we're pretty European business. And normally, again, we don't know what's going to happen. Normally, those folks take vacations in the summer and we usually see a downdraft of I don't know something like 3% or 4% from Q2 to Q3. So our normal seasonality would have projected these numbers as well.

Yes. And I might add one more to this which is you're trying to figure out the COVID pace of recovery in Europe in Q4 and it's kind of probably not something you want to get out on a limb on. So maybe if we think there's going to be a bit of an opening there, more folks going into hospitals, getting treatments, but not a crazy opening like we feel like we felt in Q2 in the U.S., maybe that's a more sort of prudent approach. And at the end of the day, it's still a 7% growth rate and tough sort of comps, if you will, as we got away from COVID last year. So I still feel like it's a pretty nice number.

And then just one last question. Just the pace of hiring for the sales force to get back up to where you were before. How long do you think that could take you?

Right. Matt, that's a great question. This is George again. Yes, it's been a little bit frustrating. We've only picked up a net 2 sales reps in 3 months. I think the pace will start accelerating. But the last time we spoke, I had 15 open requisitions, I believe at the last call, and I have 27 sitting out there right now. I've gone a little bit wider geographically, while it's -- I would say it's 2/3 or should be 2/3 in American issue because of this new Artegraft acquisition. We've gotten a little bit more okay. Well, we can fill in in Japan. We got that Japanese XenoSure approval and some stuff in Europe with the comeback of XenoSure in Q4 for XenoSure Europe. So I don't know when it does feel like it will start getting a little faster. In the meantime also sort of in terms of teeing up the hiring machine. We've got a net add of about 2 new regional sales managers, one in Europe and one in the U.S., and I think that's on a number of like 15 or 16. So you got more higher ears. And I think with 27 spots open, you'll see it pick up, but it's tough to guide when people will take jobs. And I'm sure on all the phone calls you've been on so far, I'm going to guess folks are complaining a little bit about, hey, it's hard to hire people, and I think we're running into that as well.

[Operator Instructions] We have our next question from Mike Petusky.

A couple of questions. J.J., I'm assuming sort of a pro forma balance sheet is something I mean is it essentially zero debt and $50 million cash roughly, I mean is that basically the math?

I think that's directional. The raise was 54.5 and then there's 6% or so for the banks. We keep the rest, take out 23% of debt and then you can take the rest of that and put it on to the cash balance.

So, Dave, I guess I want to ask, in terms of just some of these targets you're looking at, I know some of these conversations go on for several quarters or multiple years or whatever. But when you look at sort of the -- whatever the number of targets are or conversations that are going on, I mean, are there sort of Artegraft size deals that you're -- you would say you were in meaningful conversations with at this point?

Yes. I mean, without getting these discussions can turn on a dime. I would say, I've got a handful of opportunities, the range up to $25 million in revenue at the moment. Artegraft, you remember, its trade sales were $15.6 million in the LTM period prior to the acquisition. It's hospital sales, Mike, we were $18.6 million. So there are opportunities that are larger than Artegraft and there are opportunities that are smaller at the moment.

And George, in terms -- if this variant issue heats up, are there things that you all learn just in terms of getting employees back to work and whatever social distancing, PPE, etcetera. I mean, if this variant does sort of become a thing, are there things that you've sort of learned in 2020 that you think will make it easier to keep your folks healthier? I know nothing's full-proof, but I guess, that's the question.

So the things that we learned. I think there may also maybe more so than us. I think it might be the employees themselves and I can't speak for all 400 of them, but I think they've all come to terms with COVID in their own way and they're watching us. We have all these distancing watches and we check temperatures on the way in. We're all spread out in all our facilities. And I think they've learned, oh, there are no COVID spreads within LeMaitre Vascular's building. I think there was one documented spread. And so, I think maybe it's more what they've learned about what the risks they're willing to take on weekends and dinners and things like that. But we've called them back to work. We really didn't get much blowback on that. We were happily surprised. There's a couple of people that needed some variances from what we were selling to everyone, but it's been nice. We haven't heard anything about it. So I think for now, we're good to go, and I think people are learning how to handle this thing better. But I think it's more about the employees and their approach to us rather than what we're learning. We're now still doing the same thing we've been doing for 12 or 14 months with all these distancing watches and 6 feet and everything like that.

I'm curious, has Artegraph now pass Valvulotomes as a product category just in terms of top-line revenue?

$6.7 million is that. I would say that the whole category of Valvulotomes, no, it hasn't passed that, but it's gotten past some of the brands, some of the individual brands. So we have 2 or 3 brands inside of there. But the whole category know that Valvulotomes is still the largest category of the company.

And has that been north of $30 million, I don't suspect it's north of $40 million?

Hang on a second. I'm happy to tell you what the Q1 number -- the Q2 number was, so let me just get it. J.J. or David, do you have that handy? I have the organic number...

Valvulotomes 7.7.

And the Artegraft just for everyone following along is 6.7 in the quarter that includes allocated shipping for both product lines.

Congratulations on the continued. I can't believe -- if you had told me we'd be here a year ago, I wouldn't believe that, congratulations.

There are no more questions at this time presenters.

Thank you very much, operator. I guess it's time to hang up.

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.