Good day, and welcome to the LeMaitre Vascular Incorporated's Third Quarter 2022 Earnings 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 Q3 2022 conference call. With me on today's call is our President, Dave Roberts; George LeMaitre, Chairman and CEO is unable to be on the call due to the birth of his daughter last week. 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 27th 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. 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 Dave Roberts.

Thanks J.J. On today's call, I'll cover three topics: first, Q3 organic sales growth of 7%; second, our continued focus on biologics; and third, hiring in two key areas. We posted sales of $39 million in Q3, a 7% organic increase. Q3 organic growth was led by APAC, up 11%, and EMEA up 8%, and the Americas was up 6%. From a product perspective Carotid Shunts up 23%, Artegraft up 12%, Allografts up 10% and Embolectomy Catheters also up 10% drove growth. Shunts benefited from a competitor exiting Europe due to the more stringent MDR CE requirements, while Embolectomy Catheters benefited from a competitor's back order. These increases were partially offset by Valvulotomes, which decreased on a reported basis, but were flat organically. Biologic devices grew 7% organically in the quarter, and represent 50% of our sales. We continue to invest in new biologics approvals. And in Q3 we made two key regulatory filings. In Germany, we submitted our application for Allografts, and in Japan we submitted the carotid indication for XenoSure. We've also recently begun shipping XenoSure to Korea and expect our first direct to hospital sales there in November. On September 30, we had 558 employees, an increase of 27% year over year. We focused our hiring in two key areas: sales reps and direct labor. Over the same period, our sales rep headcount increased by 28% to record 118, while direct labor headcount increased by 54% to a record 213. These initiatives should drive sales and profitability in the quarters ahead. We expect to end the year with 125 sales reps. With that, I'll turn it over to JJ.

Thanks, Dave. Q3 2022 sales were $39 million, an increase of 2% on a reported basis and 7% organically versus Q3 2021. FX headwinds continue to be substantial and we lost $1.9 million in sales due to the strengthening dollar in Q3. For the full year 2022, we estimate that we will grow 9% organically versus 2021 and will lose $6.4 million in sales due to the strong dollar. In Q3 2022 we posted a gross margin of 64.2%, a decrease of 60 basis points versus the prior-year quarter. The strengthening dollar decreased our gross margin by 170 basis points, while unfavorable sales mix was offset by average sales price increases and manufacturing efficiencies. As Dave mentioned, we've increased the size of our manufacturing team. This should have a positive impact on our gross margin in the first half of 2023. Increased direct labor headcount should also increase output and mitigate any potential MDR transition or supply chain issues. Q3 2022 operating income was $6.2 million, reflecting an operating margin of 16%. Operating expenses increased 20% in Q3, as we continue to hire and invest in many areas, particularly our sales and regulatory departments. Before year-end we intend to submit MDR CE mark applications for five additional products building on the seven we submitted in 2021. Our revised guidance reflects these efforts and shows an 18% operating margin in Q4. The cash on our balance sheet continues to grow. We ended Q3 2022 with $79.7 million, an increase of $4.1 million versus Q2 '22 and $9.8 million since the beginning of the year. The Q3 increase was largely driven by cash from operations of $7.3 million, partially offset by dividends of $2.7 million. Turning to guidance, we expect Q4 2022 sales of $39.8 million to $42.2 million, which represents a reported increase of 4% at the midpoint and 9% organically. We also expect operating income of $6.6 million to $8.2 million, which represents a decrease of 11% at the midpoint. Our Q4 2022 EPS guidance of $0.24 to $0.29 per share implies a midpoint of $0.26 per share and represents a decrease of 5%. Before opening it up to Q&A, I'd like to welcome our newest Board member Martha Shadan who joined us in September. Martha has over 20 years of life sciences experience, most recently as President and CEO of Miach Orthopedics and prior to that Rotation Medical. She currently serves on the Boards of CVRx and AdvaMed. With that, I will turn it back over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Michael Sarcone from Jefferies. Your line is open.

Thanks. Hi, Dave. Hi J.J. Thanks for taking the questions, and congrats to George on the new addition to the family. Just had a question on 3Q, I think guidance was for 10% organic growth and you came in at around 7%. Do you think you can just talk about what drove the shortfall versus expectations and maybe comment on how activity trended throughout the quarter?

Sure. Thanks for the question, Mike. And one big part of the story, obviously, going through, everything is FX these days. And so versus when we guided, FX hurt us on the topline by more than 100 grand maybe 125,000 or 150,000 or so. So that's a piece of the story. And Valvulotomes had a light quarter as well, sort of, maybe 500 or 600 grand less than we were thinking when we gave guidance. And I would say that they just sort of had an air pocket and that happen sometimes. And so, it was a light quarter there. And we also had a little bit of a back order issue with one of our product lines in Europe and that hurt us a little bit as well. And I think those were sort of the topics in and around why we missed. The cadence through the quarter was sort of low July, low-single digits and then August sort of low double digits and then sort of high single digits in September, something like that in terms of growth rates. So there wasn't really necessarily a clear pattern of increasing or defending that you could sort of glean from that. So I would say, overall, yes, it was a little lighter than we thought, but still up 7% organically, which is pretty much in line with sort of where we've been historically in that 7% or 8% growth rate.

Sure. Thank you. That's really helpful. And I guess just as a follow-up, can you talk about, I guess, how activity has trended through October and around the back order issue in Europe. I guess, I'm getting to, how do you -- can you talk about your confidence in accelerating from 7% organic to 9% in the fourth quarter?

Yeah, Mike, it's Dave. Thanks for the question. Yes, as JJ said, there wasn't really much of a pattern that we could glean from the months in Q3. And for that reason we're a little bit reluctant to talk about procedures and all that. But suffice it to say that, obviously, the organic growth rate that we're guiding for is up to 9%. So we're feeling good with that figure and, of course, one of the topics is that, we've grown our sales force fairly quickly as we talked about in the prepared remarks, we're up to 118 sales reps, that's up 28% year-over-year. And so, we're hopeful that as these few months continue to pass these reps will be able to gain more traction and that's part of what's giving us the confidence to increase the organic growth rate in Q4.

And Mike, I can give you a little more sort of sequential flux that might help you sort of fill in some of the story here. Q3 is typically a little bit lighter than Q4, and so as you're going from Q3 to Q4, and I know you asked about year-over-year growth rates, but maybe just a little color on how we get from one to the next. You can expect a nice uptick from seasonality, the days -- we actually had fewer days in Q4 than Q3, so that might hurt us a little bit and FX is going to hurt us a little bit as usual also, but we talked about that Valvulotome piece earlier in Q3 and I'm going to guess we'll have a nice rebound in Valvulotome from Q3 to Q4, that will help us pick up a little volume there as well.

Great, thanks for all the color.

[Operator Instructions] Your next question is from the line of Matt Mishan from KeyBanc. Your line is open.

Hey guys, this is [indiscernible] on today for Matt. Just wanted to follow-up on guidance, I think you just touched on revenue, they sense around FX and some of the issues around valvulotome. Just looking at margin though, it seems like it was definitely a step down and looks like a local trough for you guys. Just wondering outside of FX which you quantified, what some of the bigger moving pieces we should be thinking about impacting that sequential decline? And then maybe specifically, giving us a sense around how some of the broader macro headwinds around inflation and supply chain that maybe impacting the near term trends?

Yeah. Sure. So yeah, the gross margin came in weaker than we thought. And you can see that. A piece of that is clearly FX and we talked about that. I'm going to say 0.2% or 0.3% of the 2.5 delta there is probably FX since when we gave guidance last time. So not a small part of the answer. Mix was -- larger part of the answer [indiscernible] valvulotomes come in with a really nice gross margin. And so when you have a weaker valvulotome quarter, you do feel that in the gross margin. And so mix in total maybe was 0.8% or a third-ish of that delta that we're talking about. I mean, valvulotomes were a big piece of that. And then on the manufacturing side we probably had a little bit more inventory write-offs or yield topics or scrap topics in terms of inventory than we've had typically. And so, that was a piece of the story. And then the high level piece is what Dave talked about a little bit I think earlier, which is the direct labor piece is an important part of our story going forward on the gross margin line. And they probably -- I probably thought they were going to get a little more efficient, a little more quickly. We've done a lot of hiring and you got to hire and you got them to do more and then you got to get them trained. And so given the number of folks that we've gotten in the door, I think it's taken a little bit longer to get them trained and efficient than I had thought. And so, I think that's dragged down on our gross margin answer in Q3 versus guidance.

All right. That's really helpful. And it sounds like some of those moving pieces are -- could be more short-term in nature. And then just like thinking about some of the longer-term initiatives that you guys have in place. I kind of feels like you may be accelerating some of the investments just given your rep count already hit the levels you were talking about for exiting the year, you're talking about like increasing the number of MDR submission, as well as the international product approvals. Why is now the right time to be making those investments? And it was planned or does it feel like you might be pushing forward a little bit faster?

It's a good question, obviously, with MDR there is a timetable on that, we -- the last day we can ship MDD products to Europe is in May 2024, last day we can sell them in Europe is May 2025. So the good news on MDR is, we're right on glide slope we're feeling good about, we've obviously submitted seven MDR applications at the end of last year and this year within the next couple of months we'll submit five more. I think, I'll just leave one or two in 2023. So we're feeling really good about that. I think that explains the timing of the regulatory spend, which is always planned. In terms of the sales force expansion, I would say for years and years this has been a really solid investment for LeMaitre investing, I think it's maybe the principal asset of the company. And so, as I mentioned, we do expect to get to 125 by the end of the year. At the moment even -- when we get to 125 a typical LeMaitre -- an average LeMaitre territory in terms of sales will be about $1.25 million. And of course, often in medtech we hear sort of the $1 million territories. So we feel like there are a lot of geographies, a lot of territories where we could still expand. We do hear many instances where reps aren't able to get the cases, for example Allografts, because it's too far away in their territories, so shrinking territory size will help address that. And frankly, I think it will also be a positive for our sales reps, the more reps we have the small the territories become. The more interesting I think the job is the more appealing and that should be good in terms of retain hiring and retaining sales reps.

And I had two other concepts about why now. One is, as we went through COVID we cut back pretty sharply on the headcount in all areas, probably too sharply. And so that rebound in hiring took a little time to get going. And I think we decided that this year, really the organization really needed to fill in a lot of areas, not just reps and deals, but in other areas as well in quality and regulatory and admin. And so I think it was a welcome answer from an operational standpoint generally, which is, it was the right thing to do for the organization. And then for the sales reps, I would say, we haven't done an acquisition in a couple of years. Dave keeps us pretty well stocked up every year with the deal. And we kind of got lucky in the sense operationally that we haven't had one for year or two, so maybe it's a good time that the reps don't have to focus on new device necessarily. And we can sort of focus on building that rep team. And so maybe that was a good time as well.

All right. Thanks very much guys. I appreciate it.

Your next question comes from the line of Brooks O'Neil from Lake Street Capital Markets. Your line is open.

Good afternoon, everyone. Obviously, the cash buildup is notable and J.J. just mentioned the acquisitions. So just curious how you guys are thinking about capital allocation now, investing heavily in the business. Maybe it is a good time to be out there and what's the acquisition environment looking like to you, David, now?

Yeah. Thanks, Brooks. Good to hear your voice. So obviously our focus is to generate cash, return to operating leverage. And as we do generate cash, probably from my perspective allocating cash to acquisitions is, has been a successful strategy for me for a long time. I would say after that, of course, is our dividend. We're in this dividend Achievers Index and we're very proud of that and it signals our commitment to ongoing profitability. And then there are other cash needs smaller like CapEx and maybe acquiring distributors and whatnot. But on the acquisitions front, yeah, it's been two, two and half years since we've done an acquisition. And we're definitely out there looking at targets we have taken a run at one or two in the last many months, don't have anything to report at the moment. But the pipeline looks good. Of course, the criteria is generally the same which was looking for products with minimally $5 million or $10 million of revenues in open vascular surgery. Although we do look a little bit at endovascular and cardiac surgery we derive about 10% or 12% of our sales in cardiac. Now an another really important piece of it is the niche low rivalry aspect, where we'd like to be number one or number two in our space. So I would say, we're on the hunt and we've got -- I've got a really solid team, who I work with on it. And as the cash balance builds, of course, it gives us greater optionality to do larger deals. So we're out there hunting. Valuations are down of course a little bit with IHI down 26% year-to-date, et cetera. And maybe deal flow slowed a little bit, in general, in terms of what the banks are reporting. But yeah, we're out there hunting and just like when real estate valuations are down, that might be a good time to buy a house, maybe it's a good time to acquire a company at some point.

Absolutely. I assume the shutdown of the plant in France went about as you guys expected?

Yeah. I think it has, it's a whole dance and a whole process over there. And there is also legal formalities that you got to make sure you work your way through over in France. But, yeah, the building is shut and actually sold. We recently sold that building. So we are done manufacturing over in southern France. We're still negotiating with a few, call it, a handful of folks on severance. But we feel like that $3.1 million number we gave you last quarter is kind of going to be about the right answer.

And just to add on, we were -- because the closure happens so close to the end of the quarter last quarter, we were unable to have that $3.1 million deducted for tax reasons in Q2, but we're able to get that in Q3. So that's why you see an abnormally low 11% effective tax rate in Q3.

Cool. Thank you. And J.J. you mentioned the valvulotomes weakness. You guys just think that's kind of the ongoing ebbs and flows of the business? There's nothing you would point to that would suggest any change in the underlying market for those?

Yeah, I don't see anything really in valvulotomes in particular that would lead you to say there is some systemic topic there, that just felt like an air pocket to me in the quarter and they happen every once in a while. And then it rebounds, it’s a franchise that has been around, obviously, with this company since the very beginning of time. It remains an important part of our portfolio and it's performed well over the sweep of time and more recently as well. So there maybe broader topics in different geographies in terms of case procedures, staffing in hospitals, maybe some COVID topics in different geographies. And remember 40% plus of our sales are not in the US. So those can sort of swing around and get you from time-to-time, but by and large the sort of mutual fund approach of products has served us well. And in this case valvulotomes did take a little dip, but I think that's not a topic necessarily going forward.

Great. Thank you very much for taking my questions.

Your next question comes from the line of Rick Wise from Stifel. Your line is now open.

Hi. This is Purnima Malik on the call for Rick Wise. I know that you mentioned in this quarter that you've acquired 118 reps and you're planning to increase to 125 sales reps this year. It sounds like this year in general, you're focused on lot of hiring. I was wondering whether any of the macro pressures have affected your decision in hiring at least the rate of which you are hiring and how this might proceed going into 2023? And then additionally, I was wondering whether you could elaborate on where you might be like under representative in sales force geographically? And then ballparking, do you have an idea about where you might want to be in 2023 as far as your sales force headcount?

Yeah. Hi Purnima, it's Dave. Great questions. In terms of the macro, of course, we've all been reading in the headlines for months and months, months, how difficult it is to hire and how lot of people are switching jobs. I'd say LeMaitre has not been immune to that. We've done a lot of hiring. However, we've had high turnover in the sales force. I'd say a little bit in our DO, even though from a company-wide standpoint our voluntary turnover here in Burlington is 5% or 6% below the benchmark. But sales rep turnover has been something we've lived with for a long time. So I think part of our coping response is to hire more reps expecting that there will be a certain amount of turnover. So that's -- the turnover does affect our -- the number of reps we hire and the cadence. And another piece of the macro that affects our reps and frankly their ability to gain traction is, with and since COVID our reps have had less access either to the operating room or to the physicians. Of course, this has gotten better and COVID itself, of course, has gotten a lot better. There still isolated countries like Japan or maybe cities in China. But by and large the hospitals and ORs are open, but the rep access is limited. So with our reps to a fair amount of on the job training, I think that COVID -- that rep access limitation has maybe slowed their training a little bit. So -- and in terms of -- I might be missing a question, but you were asking where are we well represented and underrepresented. We've been doing a lot of hiring in the US and frankly in part due to Artegraft, which has just been a very solid acquisition and we keep hiring sales reps to promote that product. I would say if you look around the world regionally, of course, China is the second largest medical device market in the world. We only have two or three sales reps there, but we have a limited number of approvals there. Korea, we just went direct there earlier this year. I mean, we have one sales rep on the ground, we haven't sold the product yet in Korea, but we expect to hear in the next month or two. And then we should be able to add reps there. So I'd say at a high level, maybe APAC is a little bit under-represented for us. And then we want to expand in the US -- continue expanding in the US as well.

Great. That makes sense. Thanks. And then I have one more question. Virtually every company that we've heard from so far has discussed how macro pressures have affected their business performance. Where do you see the macro pressures stabilizing or even improving?

That's an interesting one. I think again for us, you got to look by geography. And so in the US, it feels like maybe it could improve a little bit. In the UK we heard the stories about there being rep shortages. And so, maybe there is a little bit of outsized improvements there potentially. I think was the Japan that had a COVID lockdown topic fairly recently. And so there has been pressure there even though our XenoSure product line is doing very well in Japan. Maybe from a macro perspective there is room to breathe a little bit more in Japan as they get out of lockdowns. So it's really almost country-by-country to answer that. But maybe those are some of the highlights.

Okay. Great. And one last one from me. So I know that interest rates are obviously increasing, how do you see this affecting like your business decisions and decisions on potential M&A candidates going forward? And just to tie then to I think something that you said last quarter, you were evaluation sensitive when it comes to M&As. So are you seeing that those evaluations are finally coming down are they coming towards your sweet spot? And then, when do you think that might be the case.

Yeah, it's sort of hard to predict that really reliably and thread the needle. Obviously, with interest rates rising we're happy, we have no debt and almost $80 million of cash, it means that we're actually generating interest income for our shareholders, which is sort of a silver lining to having all that cash. But in terms of interest rates rising, I would say, obviously, that's depressed valuations as we've mentioned already. It's really hard to predict how much further down valuations go and what that trajectory looks like. But in terms of leverage, to the extent that we use debt to fund acquisitions, our mode of operations is used cash on hand first, we are probably at $50 million to $60 million of cash on hand that we could use. We want to leave a certain amount of working capital. But then, secondly, using debt. Well, the debt market is not what it used to be. And so we're probably a little bit more cautious about how much leverage we would use in an acquisition. And then the cost of that debt would be higher. So we have to factor that in as well. But in the meantime I don't say we necessarily try to time the market in terms of that medtech valuations going up or down, but clearly they are heading down. And I would say, as a rule, public company owners of potential carve out targets are probably -- they are getting the emails sooner than private company owners who may be reluctant to admit their businesses worth less, because they can look at the stock price every day. But we're very conscious of it and for us, I think the more important factor is long-term strategic fit. And yes, we always want to -- we are always valuation sensitive but more importantly, we want to find the right target strategically and when we do that in the long term, we win and our shareholders win. So that's really what we're focused on.

I don't know if you said this, if you did I apologize for repeating. But the bright side of increased interest rates is our interest income on our excess cash. And so we're sort of at a $1.2 million run rate now per year for interest income, which is a nice improvement over where we've been historically. So there is a silver lining there.

Okay. Great. That's excellent color. Thank you.

Your next question comes from the line of Michael Petusky from Barrington Research. Your line is now open.

Hey, guys. J.J could you give me -- if you've already given that I missed it, stock comp CapEx and cash flow from ops, do you have it?

Yes. [indiscernible] prepare these for you faithfully every quarter, Mike. Depreciation and amortization, $2.3 million, stock comp $1.19 million you want another one that I didn't prepare [indiscernible]

CapEx [Multiple Speakers]

Yeah, $460,000.

And what with cash flow from ops. If you have it?

Cash flow, you're saying free cash flow, what you want?

No. Cash flow from operations before CapEx.

$7.3 million -- $7.35 million

I didn't catch -- have you guys disclosed anything on XenoSure performance during the quarter.

It grew 15% organically, 8% reported.

And what was the actual reported decline in Valvulotomes, like down 5% or something like that.

Yeah. Valvulotomes were flat organically, reported down 6%.

Okay. And just to confirm, I think you guys had maybe given some thought, but we're leaning against raising price before your typical sort of first of the year. Did you guys hope to that or did you guys make some price adjustments since last commented.

We've not made price adjustments, I think we're sticking to that sort of beginning of year annual and we didn't -- I don't know, I felt like we didn't want to overreact to any transitory topics and then sort of look at -- we wanted to look at the businesses at a higher level over a longer sweep of time and figure out what makes sense from that perspective. We're pretty aggressive from a price hike standpoint already and you see that in our corporate presentation getting sort of 3%, 4%, 5%, 6% a year blended worldwide. So I feel like we're -- that process, the cadence of that processes has and will remain the same for this year.

Is it fair to say with inflation how that sort of hitting everybody that maybe you guys heard a little bit more aggressive in terms of pricing at the first of the year or no?

When we buy, we try and buy a lot of nice data to guide us on this topic vis-a-vis competitors pricing and market share changes and do that by fairly specific geographies. And we really rely on that. It's more of a market will bear topic and that's sort of what makes sense topic in terms of pricing strategy as opposed to a cost base topic, the cost pieces, obviously, come into play, but I would say maybe their consideration number two and the first pieces is what I mentioned sort of what's going on in the market.

In terms of -- it was great color on the sales, sales were up number and the direct labor number, you said that the rep number could move up another six or seven by year-end. The direct labor, I mean, is 213, is that about right or do you need to do any more material hiring there.

I would say that -- Hi, Mike, it's Dave. I would say 213 is a good level. Maybe we could do a little bit more, but frankly, I think we're sort of nearing a near-term plateau on that. Our focus now more frankly than bringing in a lot more direct labor employees is on getting the ones we have trained up and getting them productive. And so, yes, our rate of direct labor hiring has been pretty dramatic, we're up 54% versus a year ago. And year-to-date, we're up 50%. So obviously, we're not expecting anything like that, but could it go up a little bit. There are still reasons to hire more reps as we need to build inventory to prepare -- to have plenty of stock on hand for MDD transitions. And to the extent that supply chain is still difficult, it's important to be able to have stock available for that. So -- but I would say we've done most of the hiring at this point

Just sort of the last the area that I just wanted to ask about, it feels like if I'm sort of listening to the comments, both on the direct labor and sort of maybe some of the newer hires not being as productive and then not coming through in gross margin improvement and on the sales side, you sort of alluded to maybe high turnover and sort of also sort of talked about, well, maybe they have a little less access and that's causing them to be slower coming up. I mean what, it feels like, and sort of the numbers sort of suggests, especially when you compare to last year, all this hiring hasn’t really driven a number. I understand the 90-day snapshot -- against the 90-day snapshot and things may improve meaningfully going forward. But I mean it's fair to say you haven't gotten the bank for the buck to this point in really either sort of hiring initiative, either on the sales rep side or the [indiscernible]

Yes, Mike, I think that's right. I think that’s generally directionally right. And I think we're trying to say that in a little bit in our prepared remarks, which is, we know this is the right strategy on both counts and sort of the right answer that we're getting to, but we're taking a little bit longer to get for that to translate into results. And so, you're always trying to say, well, rep count is up this percent and so organic growth should then increase this percent and that correlation is not always as direct you want it, but we know over the sweep of time and in the medium term and certainly in the long-term it is and it's the right answer. And so, yes, we got to wait a little bit longer. That training for sales reps has been hampered we think by access to hospitals for COVID reasons and also maybe for staffing reasons in hospitals and maybe some other reasons as well. And so -- and also when you hire quickly maybe you make some mistakes along the way. And so some of that has probably gone as well. And maybe there are similar themes in the direct labor piece, but we've done both of these strategies before and we know they worked well. So we feel confident that this is the right direction.

Okay. Just real quick on the sales reps. I mean, have you guys lost any like super productive key reps over the past three to six months that just have been difficult to replace or replace effectively.

Mike, I -- of course, we always -- we never like to lose a rep. I mean, if a rep isn't performing usually they on a plan and so the reps we do lose we never like to lose them, but this has just been -- rep turnover is something we've lived with ever since we had sales reps. And so have we lost some good ones. Yeah, probably, but it's a bell curve and we've lost some good ones, and we lost some non-good ones, and it's probably no different than rep turnover in the past, except the numbers are bigger because we have more reps. I don't think we sit here and Nash our teeth about oh gosh that one rep left, we're really, really upset about that. I mean we diversify -- we're very diversified with 118 sales reps. So we're firing on a 118 pistons. And so if one of them decides to leave that's their prerogative and we will replace that person.

All right, very good. Thank you.

Your next question is from the line of Jim Sidoti from Sidoti and Company. Your line is open.

Jim, we can’t here you. Now we can.

Okay. Sorry, the moderator cut out just as you say the name. I wasn't sure if it was me or not. You mentioned a little earlier in the call that there was a back order in the quarter, is that issue resolved now and will that product shipped in the December quarter?

It's getting resolved as we speak. And yes, it will be shipping in Q4. It's -- you remember, Omniflow, the [O line] (ph) grafts, they were transferred here to Burlington in terms of their manufacturing. And so the start-up of that manufacturing process wasn't -- there is always a learning curve and it's always a little less efficient that you want it to be. So as we started that up we created a little bit of a back order. But, yes, we're working our way out of it Jim.

Okay. And then it sounds like there is a light at the end of the tunnel with regards to the MDR process. Do you think that that spending should come down in 2023 and can you just remind us what you spent for that in 2022?

I'll take the first part of that question. So obviously, the MDR spending has ramped over time it ramped a little bit earlier for us, because we had to change notified bodies for our MDD approvals and so we started to make investments a year or two ago on that. But clearly with filing the seven MDR applications at the end of ‘21 and there's a lot of clinical evaluation report work to develop and dossier development. So it was ramping then and then this year, again, with another five applications going in by the end of the year. I would say we're -- if we're not at our plateau we are near it and so we hope to start getting approval sometime in the next 12 or 18 months. And once we get the approval that the spend doesn't go away, it declines a lot, but there's an ongoing requirement for clinical data and whatnot. But I would say if we're not at the plateau we're sort of near it now and 2023 maybe is still high, but certainly 2024 we would expect it to start to come down.

Jim, I'm going to be a little more cynical about it, I'm going to be like, well, number one, we had the CE Mark issues and we got to -- we spent a bunch of money and we got through that and that was replaced with MDD, MDR and somebody is going to come up with something new to spend it on. So I'm going to say, yes, the MDR spend will come down, but I don't know whether it's going to be replaced with, we'll see, but you asked about numbers. I'll give you the regulatory and clinical spend in the last three quarters, $1.7 million, $2.1 million and $2.2 million and if -- we're not talking about next year yet, so we'll see where all that goes. But you can make assumptions from that about up, down, left, right, and what percent, but you can get a handle on that now given what the spend was in those three quarters and

Okay. And then just -- if we do hit a recession next year, based on past recessions, do you think any of your product lines are vulnerable or do you think that most of your procedures are pretty recession resistant?

I feel like this one is a little bit controversial. I'm more on the -- we are largely non-discretionary procedures, if you get a blockage in your leg, you got to get it fixed at some point, it doesn't have to your foot is tingling, it doesn't have to be next month or the month after or maybe four or five months after, but it's got to get done at some point. And so, all roads lead to a procedure at some point and that typically means you're at the LeMaitre store buying a device to fix that. And so I would say, yes, they are largely non-discretionary, but they do ebb and flow and we saw that with COVID right. We have a weak quarter and then we have pent-up demand, and then we have a stronger quarter. And so I'm going to say that same sort of dynamic could be at work with other topics as we go forward economics or otherwise.

Okay. All right. Thank you.

Your next question comes from the line of Scott Henry from Roth Capital. Your line is open.

Thank you. Good afternoon. And first, congratulations to George, that's pretty exciting. I just had a couple of very brief questions. First, when looking at the gross margins, obviously, the strong dollar creates a lot of noise there and the mix is also a factor, but when we think about that line going forward, if we think at a constant currency basis, should we think about it trending higher or should I think about it more of being between 65% and 70% and bouncing around based on mix, just trying to get an idea how to think about the trend in that line constant currency.

Yeah. So you're right. And so -- great question. So, I guess the first level set piece of this would be year-over-year FX hurt that gross margin by 1.7%, 1.8% something like that. So we came in with 64.2%, but really you can add a couple of percent to that to put it apples to apples with the prior year. So to the extent that the dollar weakens, you can feel the magnitude of the relief on the gross margin line going forward. But in terms of where that goes otherwise, exclusive of FX going forward, we obviously aren’t guiding on that at this point, we're just giving you Q4, but we have told you conceptually that we think that direct labor team, the size of that team increasing is going to help as we move forward. And I think in prior calls, we've talked about some cost-saving topics that could be material in and around cost of sales, like, shipping of our XenoSure tissue from Australia and sourcing it from Australia versus sourcing it from the US and can we make that switch and how that happened, I would say, with substantial amount of money. And there are some other cost saving pieces that are ongoing within cost of sales that could help going forward. So there is a ton of puts and takes in gross margin, you can get into [indiscernible]. But I would say we're frustrated with the level that we're at and we're going to work hard to improve that going forward, regardless of the FX topic.

Okay. Great. Thanks for that color. And then, similar question but in a bigger picture. I mean it sounds like 2022 is a pretty heavy investment year, you've added a lot of employees, you've added sales reps, but operating margin has kind of declined a little, which also was hurt by currency. The question really is, would we expect to start to see the leverage from this year's investments? Would that be, I guess, more pronounced kind of in first half of ‘23 or maybe more of a second half ‘23 impact? Just trying to get a sense of when we should expect kind of the payoff from that investment? Thank you.

Scott, its Dave. It's a great question. I would say obviously we're making -- we're doing this hiring of the DO and the reps and other personnel, frankly, because we think they're all good investments. And have they paid off yet? No, not necessarily, not as quickly as we would like. Of course, everyone is doing their job and so we appreciate that. But we feel like it's taking a little bit longer than we would have thought. And so, you can see our guidance for Q4. I'm a little bit reluctant to get into the timing of what happens next year, if COVID taught us anything, it's -- boy, you make predictions at your own payroll. And so I would say maybe we can take a pass on that question. We will be clear, I think when we report on Q4, we will give you the full-year guidance for next year. And at that point, you'll have a good sense. But right now, our focus is to get -- to work on the productivity of our entire team and position us well as we flip the calendar in 2023.

Okay. Great. Thank you for taking the questions.

Next question is from the line of Javier Fonseca from Spartan Capital Securities. Your line is open.

Hello, Dave and J.J.. Thanks for having me on and congrats to George on the news. And my question is more along the lines of the commercial performance of Artegraft and obviously, as it was mentioned in the previous earnings call, management's intent to file for CE Mark in ’23, business remains the same. And also as a quick follow-up, overall how does the growth look for Artegraft given its impressive commercial performance so far.

Yes, so on Artegraft we do expect to submit the CE Mark, the MDR CE application in 2023 at some point, not exactly sure when. Frankly, it's a biologic product, et cetera, animal origin. So we would expect it to take a year or two to get approval. So with the success we've had with Artegraft in the US, obviously, we feel like it's a priority to bring this to Europe. And so we're excited about on that submission. But frankly in terms of building into your model, it's a little ways off in terms of revenue.

And Javier, in terms of the success as that moves going forward is a topic around units and pricing in Artegraft. And I would say a lot of the nice growth that we've seen has been pricing so far and we've been working to move the price of the device more in line with its value, within its category of devices that it competes in. And we think we've done that. And that put the reps a little bit on the defensive, because they're out there busy defending price hikes, some of these guys at corporate instead of having time to necessarily go out and get new accounts. And I'm going to guess, but I don't know that you're going to see that shift a little bit over time as the pricing increases become less, less severe, I guess, I'll say, and more normalized. The unit growth hopefully should improve more.

And I would just add one other concept to that which is, as we've been expanding our sales channel, Artegraft 99% a US product line currently. I think it's may be approved in New Zealand, but it's a US product line. We've increased the size of our Americas sales force dramatically. And Artegraft I believe is either the number one or number two product line they focus on in the bag and has been for some time. So we have a lot of rep focus on that product line and we continue to be very excited about where it can go. It's historically been focused in the dialysis access space, but our reps are gaining some success expanding that out to peripheral vascular and even trauma. So we continue to be very excited about that product line.

Excellent. That's some great color. And I guess my only other question would be on, just additional commentary on the current FX -- on the foreign exchange environment, obviously it's very difficult to deal with these headwinds [indiscernible], but are there any measures or changes went on that would -- going on to better mitigate this risk going forward of the strengthening dollar.

We about hedging historically and we've looked into it and we've decided. You know what, we're not here to be hedging against these topics, we're here to sell medical devices and bring great medical devices to patients. And so, we've not done that. We do feel like we're sort of 50% hedged generally from the top line and the bottom line. So if the topline is impacted by 100, let's say at the bottom line by 50. And that's kind of a nice place to be. That's part of that international reach that we have and it's got a nice built-in natural hedge for us. And so we've been content with that historically.

Excellent. Thanks for taking my questions.

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.