Welcome to the LeMaitre Vascular Q2 2022 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.

Thank you, operator. Good afternoon and thank you for joining us on our Q2 2022 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 US 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, July 28, 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, as well as operating income, operating expense and EPS excluding the special charge in gross margin, excluding the impact of foreign exchange. 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.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks, J.J. On today's call, I'll cover several topics. Number one, Q2 organic sales growth of 8%. Number two, biologics continue to drive our growth. And finally, number three, our sales footprint continues to grow. We posted record sales of $42.1 million in Q2 and 8% organic increase. Q2 organic sales growth was led by Europe, up 11% and Asia Pac, up 11%, while the Americas grew 6%. Biologics drove Q2 2022 sales growth. XenoSure was up 21%, allografts 25% and Artegraft 11%. Biologics now represent half of our sales. The Japanese XenoSure launch continued to exceed expectations in Q2, as did the Canadian cardiac allograft launch. Q2 also saw the launch of allografts in the UK and we continue to target a German allograft filing by the end of 2022. Omniflow received its CE Mark and Health Canada approval in Q2 and we made our Chinese cardiac XenoSure filing in June. We also begun prepping for a 2023 Artegraft CE filing. Rep headcount stood at 111 on June 30, up 26% year-over-year. We currently have 14 open rep requisitions, and my best guess is that, we will land between 115 and 120 reps at year-end. We're also starting to make plans to open a Paris sales office in Q4, Q1 as France remains our only G7 country without an office. While extensive our network of 12 sales offices is meant to put our medical devices is close to hospitals as possible and we continue to go direct worldwide. In terms of activity level, we're seeing surgical congresses begin to pick up and hospital access for our reps seems to be getting back to normal. T&E expenses in Q2 2022 were up approximately 55% over Q2 2021. I'll now turn the call over to J.J.

Thanks, George. Q2 2022 sales were $42.1 million, an increase of 4% on a reported basis and 8% organically versus Q2 2021. FX headwinds have been substantial and we lost $1.7 million in sales due to the strengthening dollar in Q2. For the full-year of 2022, we estimate we'll lose $6.2 million in sales due to the strong dollar. In Q2 2022 we posted a gross margin of 66%, an increase of 20 basis points versus the prior year quarter. Notably, if we exclude the year-over-year impact of the strengthening dollar, our Q2 2022 gross margin would have been 67.4%. We have increased our direct labor manufacturing team from 132 employees a year ago to 203 today, an increase of over 50%. This should have a positive impact on our gross margin by the end of this year and should also guard against the MDR transition, supply chain disruptions and any lingering labor force scarcity. And another effort to improve our gross margin, in June, we closed our factory in St. Etienne, France. This 17-employee factory produced Wovex and Dialine polyester grafts, Chevalier valvulotomes and biologic glue. The manufacturer of Chevalier valvulotomes has been transitioned to our Burlington facility and we intend to transition Wovex and Dialine customers to our Burlington-produced AlboGraft polyester grafts. The closure resulted in a special charge of $3.1 million in Q2, but should produce savings of approximately $1 million per year. Excluding the St. Etienne special charge, Q2 2022 operating income was $8.9 million, reflecting an operating margin of 21%. Operating expenses, excluding the special charge, increased 21% in Q2 as we continue to hire and invest in our sales, regulatory and quality departments. Our revised guidance reflects this effort and shows a 19% operating margin in Q3, followed by 22% in Q4. The cash on our balance sheet continues to grow. We ended Q2 2022 with $75.7 million, an increase of $4.8 million versus Q1 2022. The increase was largely driven by cash from operations of $9.2 million and partially offset by dividends of $2.7 million. Turning to guidance, we expect Q3 2022 sales of $39 million to $41 million, which represents a reported increase of 4% at the midpoint and 10% organically. We also expect operating income of $6.8 million to $8.2 million, which represents a decrease of 17% at the midpoint. Our Q3 2022 EPS guidance of $0.24 to $0.29 per share implies a midpoint of $0.27 per share. For the full-year of 2022, we are increasing our sales guidance to $162.7 million to $165.3 million, which represents an increase of 6% at the midpoint and 10% organically. We also expect operating income of $29.5 million to $31.2 million, which represents a decrease of 17% at the midpoint and 8% excluding the special charge. Our 2022 EPS guidance of $0.99 to $1.05 per share represents year-over-year decreases of 19% at the midpoint and 7% excluding the special charge. With that, I'll turn it back over to the operator for questions.

[Operator Instructions] Our first question comes from Zach Weiner with Jefferies. Your line is now open.

Hi, everyone. Thanks for taking the question. First one from us. Just a question on how the supply chain is being impacted. We've heard through the first bit of earnings here some companies talking about supply chain impacts, any impact from you guys?

Hi, Zach. Thanks for the questions. It's George. I would say generally not, we'd try to be looking ahead and hiring a lot of direct labor employees to be able to appoint employees at manufacturing certain products. But in general, I don't think that's something we're going to be talking about too much on this call.

Got it. And then just more forward looking, as risks and conversations around economic downturn or recession, whatever term you want to use, you guys have talked about increasing your hiring plans through this year. Any plans of -- will the recession risk impact hiring in outer years?

I mean, I can't -- I don't think I can guide deep into 2023. But for now, I don't think that applies to us. I think we see things going fairly well right now.

Got it. Thanks for the questions.

Thanks, Zach.

[Operator Instructions] Our next question comes from Brooks O'Neil with Lake Street. Your line is now open. Brooks O’Neil: Thank you. Good afternoon, guys. I guess, I'm curious, did I do the math right, or is there a little slippage in EPS guidance outside the special charges? And if I did the math right, what would you attribute that to?

Yes, Brooks, thanks for the question. So since last guidance, the EPS is down a little bit. I would say, the special charge was a little higher than we thought. And I think we're continuing to hire along the lines that we've talked about the last couple of quarters without sort of slowing down on that and maybe that's part of that answer as well. The FX topic is always around us on this. And so, since our guidance, I think FX hurt our top line by about $600,000. So maybe half of that answer is sort of go into the bottom line as well. So there is another headwind for you. And then in Q2, if you look at our Q2 guide versus actual, we were over by about $600,000 for that. So if you add those topics all up, I think that gets you sort of the slippage that you were talking about. It's notable, however, that if you look at our Q4 guidance, our op margin in Q4 rebounds were at 22%. So I think it's safe to sort of imply in there that the cadence of hiring sort of normalizes at some point. We've really been hiring a bunch of bodies and that normalizes at some point. I think you start to see a little improvement there on that op margin in Q4. Brooks O’Neil: Yes, that's great. And you can see the numbers in the headcount that George mentioned. So, I totally get that. You think you're being proactive and taking advantage of hiring people, you feel are good people who can really contribute to LeMaitre going forward and help you get through this environment, right?

Of course, we do. But they are separate in three pieces. One is building back the sales force. We were at 112 before the pandemic and now we're at 111. So we're still falling a little further on that. The second piece would be these direct labor folks. I mean, we're up a ton, we're up roughly 80 folks in direct labor and I think that is trying to go after the gross margin, as well as pre-empt any supply chain disruptions. So we should get a better hourly labor rate on that. And then also, you've seen us struggle with the CE Mark backwards, the MDD CE Mark and then the CE Mark coming at us, which is the MDR and we've clearly having to hire more bodies to handle that European approval system, which is all brand-new and really locks in, in the middle of 2024. So three types of bodies there and we're hiring a lot of them. Brooks O’Neil: Yes. Okay, that's good. So the last question for me. Obviously, the cash buildup is very impressive. I'm curious how you think about capital allocation? Obviously, the acquisition environment must be a pretty attractive in the current overall macro environment, we see, but there might be some other things you want to spend the money on to.

Yes, Brooks, it's Dave. Thanks for the question. Obviously, the cash balance out there, as J.J. mentioned, in terms of our capital allocation, we have our dividend, which we've increased 11 years in a row, we're in the Achievers Index. But, of course, really the excess cash, the growing cash balances is aimed at acquisitions. I would say, valuations certainly, obviously, led by the public markets, which peaked in medtech may be about 10 months ago. We see the valuations coming down. Usually, there is a lag in the messaging between the public markets and sellers, whether they'd be public carve-outs or private. But we do think valuations are slowly coming down. We saw that PE firm take Natus private for less than 3 times sales. So, we think that's happening. And yes, our team is out hunting as we always do for these core open vascular products, disposables and implantables with, I don't know, $10 million or more of revenue ideally in [indiscernible] rivalry markets. So while hunting, we have a pipeline and -- but things have to go correctly for us to pull the trigger. So we're still doing our thing. Brooks O’Neil: Absolutely. I get that. I lied. I have a couple of more quick just real fast. One is, are you guys comfortable letting the biologic percentage of the total revenues keep creeping up and or is that a focus? Or would you seek to balance that? And then secondly, just curious how you think about the stock repurchase. You got a lot of cash, you got $20 million authorized. Do you think we'll see share repurchase in this environment? Thank you very much for taking all these questions.

I'll take biologics part. On that, yeah, for us, I would say, we're very comfortable with biologics now representing 50% of the company's sales. Obviously, we've been buyers in the biologic space. We've been, not just acquiring in this space, but we've been investing in additional regulatory approvals. And so -- and, of course, biologics, I think most listeners know are better at fighting and preventing infection than synthetic implants. They have better handling properties. And so, yes, we were thrilled to have 50%. That being said, it doesn't mean that in the next product line or a company we acquire will be in biologics. We like non-biologics as well. But it has been a theme, and we're very comfortable with where we're at.

And then, Brooks, as to your share repurchase question, of course, I probably wouldn't tip my hand as to when we're going to do a share repurchase, if ever. I would point out that we did issue the equity last summer at about $53 a share approximately. Is that about --

I think $54.

$54. So we're sort of tied up to that right now. I think today, the stock is at $48. So, it will be a little odd for us to take the action of selling those shares and just run back and use it as a buyout facility or a repurchase facility at $48. But we'll never got -- I don't think you'll ever gets us guiding on that topic. Brooks O’Neil: Okay. I got it. Thanks a lot. Keep up all the great work you guys –

Thanks a million Brooks.

One moment please for our next question. Our next question will come from Mr. Wise with Stifel. Your line is now open.

Hi. This is Purnima Malik on for Rick Wise. Given your second quarter, George stated in the press release that the annual guidance has now been increased to 10% organic growth. I know this might be early to ask. However, do you see this growth as sustainable going into 2023?

Right. Hey, thanks for the question and welcome to this phone call. You're right to outcast that, I probably don't want to give guidance into 2023, but we're real excited. I think the cadence is 10% organic for Q3 and then the implied is 11% for Q4. So some nice numbers in there, that's sort of the high end of who we've been recently, but I don't think I'd want to dip into 2023 until I have to.

Okay. Thanks. And I have one more question. Can you tell us more about what you expect as far as currency impact during the second half of 2022, given that there is the strong dollar reduced sales by $1.7 million during this quarter?

Thanks for the question. So for the full year, year-over-year, we think it's about a $6.2 million impact. The year ago, basically 118 to 105 full year versus full year. And then in the back half of the year, specifically towards your question, it feels like a couple million dollars in Q3 year-over-year negative impact to sales and maybe $1.7 million or so in Q4 negative impact to sales. So I'm sure you've been hearing this in all of your other companies, but it's a big topic for us, 40% of our sales-ish outside of the US, a lot of that in euro denominated, but the yen really getting weaker against the dollar as well. So this is an important topic for us, not just on the sales line, obviously, but obviously on the bottom line, too.

Okay. Thank you.

Thanks a lot.

One moment please for the next question. Our next question comes from Matthew Mishan with KeyBanc. Your line is now open.

Good afternoon and thank you for taking the questions. You guys are doing really good work on the gross margin side in a very tough manufacturing environment. I'm just curious kind of your confidence in trajectory of gross margin back into that high 60s, low 70s over the next couple of years?

I don't know about the next couple of years, but I'll speak through this year and generally trends on what's going on in gross margin. I generally think more specifically in the current quarter and the sort of guided quarters, there's a couple of nice trends going on. One is, our E&O has sort of gotten a little more changed these days and I think as such believe it will be in the coming quarters. So that's sort of nice. But in addition, we've hired, as George has mentioned, and I think I mentioned in my piece also a bunch of GL folks, and this is going to help the margin as we get into the back part of the year. And so as we hire more folks and they make more units and absorb the same amount of fixed cost, we should be getting sort of more improved margins on that. In addition, we're working on internally with some nice cost cuts in and around the cost of goods sold line and so in different areas of our COGS, sort of business, we're looking at some nice important cost cuts that we think will bear some fruit in the back half of the year. So I would say that there's some sort of nice trends there. Going forward more broadly, I would say, price hikes are something that we do pretty regularly in January, as you know, maybe averaging 4% or 5% a year, average selling price hikes. And so you can certainly think that, that's going to, I would imagine, continue over time. Hopefully, some of these other trends do as well. If you look at our gross margin as it plays out through the year, yes, we're starting at 65.6% in Q1, now we're saying 66.7% for Q3 and then 67.5% for Q4. So it is a nice cadence. I think it's doable, and we think we have some nice dynamics internally to get there.

Okay. Excellent. And then just a follow-up question on the Biologics. It seems as if like there's more of a focus on it, especially in the prepared remarks. Are you seeing like share gains with doctors, with biologics versus synthetic? Is there some kind of change that's occurred like the last year or so?

I mean -- this is George, sort of following up on David's answer previously. Yes, in general, I do -- it is pretty clear that in a lot of categories, they switch to biologics. It's nothing new, though. It feels like it's a 15 or 20-year secular trend where the docs prefer to use biologics. They handle better than the synthetics and the doctors believe there's not that much paperwork out there for this, but the doctors believe they have better results for the biologics.

Thank you very much.

Thank you.

One moment please for our next question. Our next question comes from Michael Petusky with Barrington Research. Your line is now open.

Thanks. Hi, guys. Few questions. So I'm assuming, J.J., based on what you just said and you sort of looked at some of the reasons you have some confidence in the positive gross margin guidance in the second half. I'm assuming there are no, there's no contemplated price increases between now and your traditional January. Is that fair? So essentially, we get the gross margin improvement and then through the end of December and then in January, we actually see some ---- presumably some price hike. Is that the way you guys --

Yes, Mike, I mean, it has been a topic with all the inflation issues going around, you can do something sort of midyear and take another price hike. And I think we've decided to lease up until this point and things could change. But I would say probably not, but they could. But we've decided where the annual price hike guys, and that's sort of our MO and we'll continue to do that. So I don't think you're going to see that in the back half of the year.

And Mike, maybe the bite was pretty big this year. I think we're thinking it's about 8% or something like that. So the bite we took was pretty big already, and maybe that's why we don't feel the need to go back again.

Okay. All right. Fair enough. That bodes well for not only the next couple of quarters, but then beyond that. Question around the hiring you've done for MDR. Is there any way to put a number on what that cost you to this point? And then sort of what you think between now and May of '24 that could cost you incrementally?

Sure. I'm not sure I want to go into '23 and '24, but I can tell you that if you look at our R&D line, which was 8% of sales in Q2 2022, most of these ups that are taking place in that line are about regulatory. Approximately 5% of that 8% is regulatory, not old-fashioned test tube type R&D. It's regulatory approval stuff. So that's -- it's a big number. Does anyone have a quarter-over-quarter and regulatory number for Mike? Maybe that's a help or even our R&D --

So our R&D, Mike, was up about $700,000 or 26% and then within that, regulatory was up about $500,000 or 28%. And so the other two, they were up markedly as well, but regulatory being the big piece of that. And Mike, it's not just bodies, there's a lot of outside services and outside testing that goes on in and around these topics of MDR and other regulatory topics. So it's both of those things that are pushing that number up.

Mike, if I could use that as a small springboard to say that we did pass through an important milestone here. The last day of June, we got what should be our last MDD CE mark, we got the Omniflow, we've been pushing hard for that approval for a bit now for about 18 months. We did finally get that. Product is shipping to Europe and it is shipping to hospitals now. So we're sort of done, if you want to divide the story up into the old-fashioned story, the MDD story. We're now sort of done with that thing. And now all of our engines are geared towards the MDR part of the story, which is the 2024 story that you're talking about.

Okay. All right. Very good. So can I just ask it again, I guess I'm not wanting a specific guidance, but I'm trying to get a handle on, do you guys have to do a lot more incrementally as you look forward? Or have you sort of put the bodies and sort of the consultants or whatever else you're utilizing here in place where you sort of just run it from -- like I guess what I'm really getting after is, does 8% of R&D turn into 9% and 10% or does it stay roughly around 8% as we move forward?

Okay. So yes, I'm not going to give an exact number, but I do feel like it pushes upwards from 8%. We've always been a light R&D company and maybe as the gross margin is repairing, we have a little bit of room to play with and the play should put money probably is in growing out the sales force and making sure that you get those MDRs approved. So yes, sort of working on that towards a 9%, I guess. I haven't really thought about the exact number. But yes, if you want to think about -- we have three types of engineers at the company. We have manufacturing engineers. We have manufacturing transfer type engineers, and we have quality engineers. And we went into the year trying to get to nine of each of those, and the goal was nine, nine, nine. We're now saying, Oh, we should be 10, 10, 10 and our 2025 plan set, Mike, we do five year internal plan sets. It's trying to get to 14, 14 and 14 with those three types of engineers. I call out those engineers because they're the expensive bodies in R&D, and there are also the things that would help us get the MDR. So it's relevant to what you're talking about here. But yes, we continue to push hard on this topic for sure. You can't -- $40 million, what are we -- 25% European is our business and 5% Asian. So you can't let that 25% go. You just have to keep putting resources at it.

Got you. Got you. And for J.J, forgive me if you explained this earlier, the tax rate, I guess what happened there? And what's the expectation going forward?

Yes. So we had the onetime special charge of $3.1 million --

That's essentially what that -- why that spike --

Yes. We couldn't get the benefit from that, Mike. So it didn't benefit our tax rate, actually it lowered pretax, but as the tax rate was effectively that never happened. So the effective tax rate is actually higher.

Okay. So going forward, though, you go back in the mid-20s?

Yes, we should normalize. [Multiple Speakers] Maybe we'll give you numbers later.

Okay.

You do not want them.

No, I definitely want them.

All right. Depreciation and amortization, $2.507, stock-based comp $1.138 and CapEx, $948.

Thank you so much. [indiscernible]

You bet. Thanks, Mike.

One moment please for our next question. Our next question comes from Jim Sidoti with Sidoti & Company. Your line is now open.

Hi. Good afternoon and thanks for taking the questions. Just two for me. On the charge related to the consolidation of the French facility, do you think you're done at this point? Or could there be additional charges spilling over into the third and fourth quarter?

Yes. They'll be a little gives and drags Jim. Maybe $100,000 or so next quarter and then maybe $50,000 to $75,000 for a few quarters after that, nothing that pops up like it just didn't this quarter. We basically accrued everything we knew about and there's some things that you have to wait to put them through the P&L or you don't know them.

All right. And you mentioned the XenoSure we filed for approval in China. Is that similar to the FDA where there's a 90-day clock with that? Or could they take as long as they want to process that?

Right. So the 90-day clock you've heard about for the FDA is for regulatory clearance site items, not for approval items. And so no, there's no sense of a clock over there. We've heard rumors that it takes about two years, remember, this is a clinical trial. We've worked for four years now to get to that filing. And so I feel if you're partly asking how long does it take? Our guess is as good as anyone as we feel like it's two to three years here.

All right. And then just on the big picture, it just feels like organic growth is accelerating into the back half of the year. Would you attribute that to procedures, more procedures being done? Are the sales folks you hired already starting to contribute?

Okay. So I would say the three things are the sales reps that you talked about. But I'd also say it does feel like there's a slow lifting of the COVID topic around all of the procedures. And then thirdly, you remember that in Europe last year, we had all these MDD/CE problems. And those are now with the Omniflow approval June 30, those are all now gone away. And so we get a nice lift, and you can see this in the numbers. The European numbers are better than the American numbers, 11% organic in Q2 versus 6% for the Americas in Q2. So those three things are helping us in the year, and it's great to be back in the 10s and 11s is a good feeling.

Okay. All Right. Thank you.

Thanks, Jim.

One moment please for our next question. Our next question comes from Javier Fonseca with Spartan Capital. Your line is now open.

Hi. Good evening everyone. Thanks for taking question. My question is around Artegraft. Knowing that there's -- this is the largest acquisition of the company, and there's still -- it seems to me there's still there's a lot of room to grow. Could you provide more color as far as -- going forward as far as any price increases or any tailwinds that could really show the continued performance of Artegraft as the top project from LeMai?

Sure. Okay. So we put in the 11% price hike this year, and it's playing out fairly well. I think organically, we're up 13% or something like that for the year. I think the big shot on goal that you might be excited about or looking forward to is when do we file the CE mark for this thing and bring it over to Europe. It's never been brought to Europe. And so this year, we're using as an opportunity to get our DUCs in order to get that filing ready to go. And then in 2023, we anticipate making the filing to the notified body, and maybe that gets approved in '24 or '25. I think that's the big shot on goal. And then there's also a Canadian topic at some point, although we haven't really fleshed out our plant as much on Canada as we have on Europe. Although usually, when you're ready to do a European filing, it means your books are in order to do a Canadian filing as well.

Excellent. Thanks very much.

Thanks, Javier.

Please stand by for our next question. Our next question comes from Zach Weiner with Jefferies. Your line is now open.

Hi, guys. Just one quick follow-up. I know you announced last quarter the closing of the plant in France and you keep out the numbers there. Are there any plans for additional plant closings that we should be ready for or watching for over the next six months or so?

Sure. So Zach, thanks a lot. It's a good question. We only have two factories remaining, one is in Chicago, one is in New Jersey. Definitely feel like over time, we've been trying to always give the employees the heads up about whether we're going to close a factory or not before Wall Street. So they'd be the first guys to hear, and we have not said anything to any of them about this at all. So for now, nothing, but we'll get to them first and then you guys second if and as we make a decision like that.

Fair enough. Appreciate the color. Thanks, guys.

Thanks, Zach.

Ladies and gentlemen, that concludes today's conference. I would like to [Technical Difficulty] and you may now disconnect. Have a great day.