Welcome to LeMaitre Vascular Q4 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. Go ahead, sir.

Thank you operator. Good afternoon and thank you for joining us on our Q4 2022 conference call. With me on today’s call is our Chairman and CEO, George LeMaitre; and our President, Dave Roberts. Before we begin, I’ll read our Safe Harbor statement. Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which 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, February 23, 2023, 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 special charges and gross margin, including 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.lemait.com. I will now turn the call over to George LeMaitre.

Thanks, J.J. On today’s call I’ll cover three topics. Number one, organic sales growth was 8% in Q4. Number two our sales force build-out and APAC expansion continued. And number three we have largely finished our initial MDR CE filings. We posted sales of $41 million in Q4, an 8% organic increase. Organic growth was led by APAC, up 22%, followed by EMEA, up 9%; and the Americas, up 6%. By product, biologic patches were up 11%, carotid shunts were up 24% and bovine grafts were up 11%. These increases were partially offset by Omniflow, which was down 55% due to a back order. We project this backorder will largely be resolved by the end of Q2 2023. Rep head count stood at 131 on December 31, 2022, up 27% year-over-year. Rep headcount grew 25% in both the Americas and EMEA and 40% in APAC. We also added two regional sales managers in 2022. Territory sizes are now smaller, and we think this will lead to better coverage of our vascular surgeon customers. Notably, we held sales kickoff meetings for all three geographies in January 2023, our first in-person meetings since January 2020. Looking ahead, we expect to end 2023 with 135 to 140 reps and sales guidance for Q1 suggests a record $43.8 million quarter or 13% organic growth. We’re also opening new direct countries. In Q4, we sold our first products from our new Seoul office. Our Korean business should be approximately $1.25 million in 2023 sales versus about $400,000 of net sales to our long-time Korean distributor in 2022. Korea is our 25th direct market, and we now have 12 offices worldwide. Also in November 2022, we signed a term sheet to buy out our Thai distributor, and we plan to open up a Bangkok office by…

Thanks, George. Q4 2022 sales were $41 million, an increase of 4% on a reported basis and 8% organically versus Q4 2021. FX headwinds continue to be substantial, and we lost $1.7 million in sales due to the strengthening dollar in Q4. For the full year 2022, sales were $161.7 million, an increase of 5% on a reported basis and 9% organically. We lost $6.1 million in 2022 sales due to the strong dollar. In Q4 2022, we posted a gross margin of 63.6%, a decrease of 210 basis points versus the prior year quarter. The strengthening dollar decreased our gross margin by 150 basis points versus Q4 2021. And if we exclude this foreign exchange impact, our Q4 2022 gross margin would have been 65.1%. We increased our direct labor manufacturing team by 54% in 2022, and we increased our Burlington manufacturing footprint substantially. This increase in production will help us mitigate any potential issues related to the MDR transition, product line changes, supply chain disruptions and lingering labor force scarcity. And while we are excited about the increased unit production, training our new and larger staff has been a challenge, and their inefficiency has hurt our gross margin. We expect to correct this in the coming quarters, and this should favorably impact our gross margin as reflected in our guidance. Q4 2022 operating income was $7 million, reflecting an operating margin of 17%. Operating expenses increased 8% in Q4 versus the prior year as we continue to hire and invest in many areas, particularly our sales team. We finished 2022 with 131 sales reps. Despite this investment we expect to slow the growth of operating expenses to 11% in 2023 from 15% in 2022. And as a result, we expect operating income growth of 19% for the full…

Thank you. [Operator Instructions] Our first question comes from Michael Sarcone of Jefferies. Your line is now open. Our first question comes from Michael Sarcone of Jefferies. Your line is now open.

Sounds like maybe we move on from Michael unless he’s there.

I don’t think he is. I will move on. [Operator Instructions] Our next question comes from Matthew Mishan of Key. The line is now open.

Hey, good afternoon. Can you hear me?

Yes, Matthew.

Okay. Excellent. The quarter was so good. I guess people are speechless. Okay. So I’ll just start with the first quarter guidance. And actually, no let’s start with the full year guidance because I think that’s more important. Where is the 9% growth coming from? How would you break it down between volume and price? And then what’s specifically driving like the 9? That’s just a really good number.

Give you a rough estimate on that. This is George. Thanks for the great question. I would say we think the price hike we installed was around 5% to 6% on January 1st in our various geographies. We will see how much we get or not, but I would say, roughly speaking, 5.5%, 6% price and the remainder on volume.

Okay. And then as I think about the different regions, where do you expect to drive the most growth? Or how would you kind of stay between the Americas, Europe and APAC?

Right. So of course, on our guidance, we never really break up the future sales by geographies. It’s just too hard. But I would say, in general, what we’ve seen for the last 5 years here is that APAC outgrows EMEA, which outgrows the Americas, sort of reflecting how new the territory is in Asia Pac. It’s a little bit less new in Europe for us, and then we’ve been here for 4 years in the U.S.

Okay. And then the last question, just as I think about gross margin through the course of like ‘23, do you expect to exit like ‘23 with a higher gross margin than – I mean, obviously, implied in your guidance was 64.8% versus 65.4%. But where do you think you exit the fourth quarter to ‘23? Do you think you exited at a pretty good trajectory that starts to get you back towards that high 60s area?

Yes. I mean if you start fiddling around with that, the interval of the math that you just mentioned, you’re going to wind up doing something like that, I think, but obviously, we’re not giving you guidance between quarters. But it’s tough to make that math work without sort of doing that. One of the big topics for us, Matt, has been the inefficiency of our DLs as we’ve ramped up the size of that manufacturing group. And it’s along two fronts. One is utilization. Are they working the proportionate amount of time that we want them to versus unutilized time whether not directly working on something. And the other is productivity when they are actually working, are they productive? And so the reason I’m telling you this is because it’s an operational challenge to catch up to that, which we will, but it will take a little time to do that. So you can sort of reflect that in your numbers as you walk through the quarters of the year, how we might recover from that operationally.

Great. Thank you very much.

Thanks a lot.

[Operator Instructions] Our next question comes from Rick Wise of Stifel. Your microphone is now open.

Hi, good afternoon. This is John on for Rick today. Just to start off looking at the full year guidance for ‘23, a bit of a range there. I’m just wondering if you could add a little color on what gets you to the higher end, what pushes to the lower end? What are the kind of key headwinds, tailwinds, crosscurrents you’re seeing as you look ahead into ‘23?

Hi, okay, I’ll try to help with this one. This is George. Things that could make it go better. If the price hikes all stuck, you never know when you put a price hike in how much it sticks, maybe how much the turnover would be with the sales force. We’ve got a lot of new reps here to see what that looks like. It’s been fantastic for the last 8 months, a very low turnover. But I guess that would push things higher if we had lower turnover and vice versa, if we didn’t. Those are a couple of the things. How quickly the Korean subsidiary takes off. It’s only a $1 million business, but that’s of interest to us as well. How long it takes to get the carotid indication in Japan is actually kind of key. If we got it in Q1, you’ll see Japan accelerate in growth. And if it takes until Q4, it will be a little bit worse. But I’ve never really been asked that question that way, but it’s a good question. It’s a creative question and there is so many moving parts. That is why we try to give a range, although how wide is the range, $4 million is the range. And you do have a taste of how close we are. And I think this quarter, we were like within $100,000 of the actual number. So at least for this quarter, our sort of range finding machine worked.

John, I’d give you maybe another lens to look through it. The four or five big product lines driving growth next year are artegraft, valvulotomes, patches, shunts and restore flow. And they each have their own story. So the extent that you can be on the right side of all those stories, you’ll be on the higher end of the range. And to the extent that you won’t, you’ll be on the lower end of the range. For example, artegraft is a story of gaining sort of some unit traction these days post acquisition. And to the extent that we get some of that, I think that will be helpful. Valvulotomes is the pricing topic, largely that George talked about. There may be some units as well, but mostly pricing, etcetera, etcetera. So there are different product, by product stories that will drive us higher or lower. But those are the five to focus on, I think.

Great. That’s really helpful color. I appreciate it. And just one more follow-up question. You talked about adding reps in ‘22, and you’re basically at the level you want to be at now. Last year, just to put it from a financial term, sales and marketing grew like 19% ish top line is like 8% to 9% organic. On that line for ‘23, should we be expecting more leverage? Is there a way we should be thinking about it as these reps ramp up? And what’s kind of a longer-term expectation for you guys for S&M growth as you reach a more steady state from a rep perspective? Thanks for taking my questions.

Maybe I’ll answer a little bit more generally and just talk about op expense in general because the heart of the op expense growth is the sales force growth. We feel like last year, I don’t know employees were up 31%, reps were up 27%. GL is up 54%. We really went not crazy, but we went to the mat to fix all kinds of issues around here. But I think we’re all committed inside the building of, hey, that was a special year, and you can’t let op expenses grow as much as we did last year. So we’re putting some kind of a clamp on ourselves of $625 as the max employees at the company this year. And I think that will help start to drive operating leverage. I think we used to have operating leverage. And over the last 2 or 3 years, we sort of lost that leverage. And I think we’re trying to find it back by limiting our growth of headcount. And hopefully, at some point, the op expenses grow less than the gross profit grows and we get some leverage.

I think I had said in my script, that op expense grew about 15% or 16% last year. We’re looking at closer to 10% or 11% this year, and you can do the same thing we just did with gross margin, look at the Q1 OpEx sort of guidance that you can impute with the year full year and then sort of assume a cadence throughout the year to get there.

Thanks.

Thank you. [Operator Instructions] Our next question comes from Michael Petusky of Barrington Research. Your line is now open.

Mike how you doing it’s George in Burlington.

I’m sorry, am I on?

You are.

Sorry, I did not hear who was supposed to be on. Sorry, I apologize. Great. Okay. 5th call today. So if I’m asking something that’s been already asked and answer forget, update on M&A pipeline. Any commentary there or anything to say?

Yes. Hey Mike it’s Dave. I would say no real update. We continue to be focused on devices, product lines, companies in the open vascular surgery field with disposables and implantables, over $5 million or $10 million of revenue. There are probably 2 to 3 dozen legit targets, and we’re in touch with them. We like niche low-rate market. So moral hunting, we’ve sort of expanded the target area a little bit. We’re looking a little bit in cardiac surgery, a little bit in endovascular as well. But I don’t think I have anything really material to report. Obviously, the cash balance is growing. So we can do larger deals, and we are looking, I would say, on the margin at larger targets these days. So we’re out hunting, but I don’t have anything to report. We didn’t just sign a deal that I’m reporting on today.

So can I just ask on – obviously, it’s been a while since it’s sort of the needle moving hard graph. Have you gotten down a track with any like meaningful, what I would say, more meaningful assets where just ultimately either something in the product...

Yes. If I understand the question correctly, yes, I mean, we have evaluated. We have made bids on assets of a reasonable size. I can think of a couple in particular that neither one of them transacted. So they are still out there and they didn’t happen for various reasons. So we are looking, but we just haven’t found anything with, what I’d say, a perfectly willing seller at a reasonable price. And so our feeling is, let’s just wait for our pitch and find something that’s right and we will pull the trigger when that happens.

What Warren Buffett says. Alright. On artegraft, would you guys be willing to share what type of level of price increase you put through in artegraft this year?

Yes, we would be. You know what I’m sitting here going, I think it was less than it was the year. I don’t have the exact number right now. I really should. I think it was like 6% or 7%. And I think the year before, it was 12%.

I think it was 11% last year.

11% last year. I know you didn’t ask that, but I think it was considerably reduced this year to something like 5% or 6%. I apologize for not having that number at my fingertips I should.

Directionally correct.

Okay. Alright. And J.J., I was just real curious on tax rate and then R&D related to MDR, it sounds like you guys have made some great progress in getting the filings. Does that mean that R&D sort of flattens, or is there a lot of expenses between now and the next year or so?

We talk about it potentially flattening, Mike. But I would say it would be up modestly, that kind of thing. Not as – we are not sort of the wide eyed guys on that like we were a couple of years ago wondering what we were going to have to spend more under control, and it’s a little more reserved in terms of the increase, but still increasing a little bit. I would characterize it that way. And then on the – yes, the tax rate was high this quarter because our spend on product development was down a little bit this year, and so we got less of an R&D credit on that. And then there were some officers’ compensation that we were not able to deduct at the end of the year for tax purposes. So, the Q4 rate was a little higher. Going forward, you can sort of think of us as the 25%, 25.5% guys.

Alright. Great. Thanks so much guys. Appreciate it.

Thanks Mike.

Thank you. [Operator Instructions] Our next question comes from Brooks O’Neil from Lake Street Capital. Your mic is now open. Brooks O’Neil: Thank you. Good afternoon guys. It’s rare that my finger is slower than Petusky, but I guess I got on a little bit late today because I too was on another call. Just want to say, I think last quarter was the event of George’s new child coming to the world. So, I hope things are going well with your family, George, and I am glad to hear you back on the call this time. So, my question is sort of macroeconomic factors. I think last quarter, the dollar strength had a big impact on results. And you might have said this earlier in the call before I got on, but can you just give us a sense for how currency and some of the various macro factors are affecting the business, particularly outside the United States? Thanks a lot.

Brooks, I was going to – maybe J.J. can handle the currency stuff after I get through this little thing. But there is a couple of articles I have been reading about staffing in American hospitals. And I know you asked for international, but I think our business is kind of 67% North America now. I think we are starting to look at while the hospitals are being correctly staffed and fully staffed, and I don’t – it’s been a long time since we made an excuse about why sales weren’t up because of COVID and COVID staffing. But I do feel like in the last two months or three months or four months, the staffing levels have been better, and we are reporting cases are going off like they always used to go off and it’s not being slowed down because they couldn’t get a bunch of contracts, owe our staffers and to help push the beds around. So, we are quite excited about that. And I think we can feel that when you talk about macroeconomics from us. And as for the currency, maybe J.J. has got some insight on that.

So, I will try and make it sequential here I guess, in a way because it is turning on us in terms of the dollar weakening. But in Q4, the FX hurt us year-over-year for about $1.7 million reduction in sales. And then for the full year last year, it was like $6.2 million, something like that. And then in Q1 of this year, ‘23, maybe it’s a $1.1 million or so bad guy year-over-year. But then Brooks starts to change as last year’s rate came down and this year’s rates starting to go up, those two are starting to cross. And so when you get into Q3, it starts to be a help year-over-year. And by the end of the year, you are kind of neutral in 2023. So, you can sort of not think about FX for the full year 2023. Brooks O’Neil: Great guys. Thanks a lot.

Thanks a lot Brooks.

Thank you. [Operator Instructions] Our next question comes from Jim Sidoti from Sidoti. Your line is now open.

Hi. Good afternoon guys. Thanks for taking the question. I am looking back over the last 5 years or 6 years, and you have never grown Q1 $2 million now off of Q4 the prior year before. Is that related to the backlog for Omniflow?

No, it’s not precisely related to that. That’s not that large of a factor. It’s some of it in there. But no, we just feel like it’s a very good quarter. And you are right to pick up the sequential cadence. It’s pretty rare that, that happens. I am glad you are following us that closely that you are watching that.

Okay. What exactly happened with Omniflow and how material is that?

Sure. So, Omniflow is approximately a $5.5 million product when it’s running correctly. In the transition from Melbourne, we used to make it there and now we make it in Burlington. In that transition, we messed up the transfer and some of the qualifications didn’t work out. We kind of got it started in Q3, and we hit a little bit of a speed bump with some of the sterilization validations. Those had now been sorted out as of January, and we are shipping to our – it’s mostly European product, Jim. So, we are shipping to our European headquarters right now. And we are actually selling devices now. So, we have broken through, it was basically a shutout for November and December, and we have indeed broken through that now and we are selling. But so $5.5 million product line in a great quarter, what does that mean it’s selling $1.75 million or something a quarter. And I think in Q4, if I remember correctly from the charts I was seeing, we sold about $700,000, $600,000 worth of it. So, we still have to catch up to that and then go a little further. So, that’s why it isn’t such a big difference between Q4 2022 and Q1 2023, because we did sell stuff in October. And now we are going to – sort of February and March, we are going to be selling stuff against that October sales. So, not exactly because of that, it’s a good quarter. We don’t exactly understand why it’s such a good quarter. Maybe some of the hospital staffing comments I was making to the last question from Brooks sort of an indication of what one of our hypotheses. We also have a pretty robust price hike on one of our valvulotomes product lines called easy sight [ph], which has always been sort of priced as a junior valvulotome option and now it’s priced exactly at parity with the regular valvulotome. So, we got a little price hike thing there, which may be a nice difference between Q4 and Q1 as well.

Okay. Alright. Yes. Well. That’s good. And my next question was related to valvulotome. Last quarter, you said you had a bit of an air pocket there. Did that come back to normal levels in the fourth quarter?

Yes. So yes, that’s right. Great memory there. Yes. I think we called it an air pocket on the call, but I wasn’t on, and then it was up 20% into Q4 sequentially. And better news here is that it feels nice in the start of Q1. So yes, all repaired, everything is fine. It’s better than fine.

Okay. Last two for me. The guidance implies a pickup in other income seems to me. Is that just the growing cash balance and the better interest rates?

Pick up on other income. Let’s see. I can tell you, Jim, down below op income there is two larger drivers. One is interest income, which has been improving for us. And so maybe there is a little bit of a pickup there. And then in the other, there is FX related to intercompany transactions and other items and so, given the swings in FX, that’s had an impact there as well.

Okay. And then last one for me is on maybe PP&E, property and equipment that started off the year at around $17 million. It dipped down to around $15 million in the third quarter. It’s back up to $18 million now. Is that the new equipment and the expanded capacity in Burlington, or what’s the driving there?

Yes. I mean we have been – in the last quarter, Q4, we spent $1.2 million on CapEx. We have been spending on the expanded clean room that we talked about, which is significant, but yes, that’s probably a big piece of it too. And I am trying to think of other larger cap.

In the neighborhood of $3 million or $4 million, though, I don’t – were you saying numbers like $18 million, Jim, I would hate to have people walk away thinking that because that’s not…

No. You ended the year with $80 million total on property and equipment.

I mean I can get back to you with the pieces of that, Jim, but I am going to guess clean room build-out as a big piece of that answer.

So, it feels like you have the people and the capacity in place now so that if demand does continue to grow, you can handle it without any major investments?

Yes. I mean I think we feel like we are happy already unit growth is positive. And so we are glad we have it. We know we are the no backorder company. And so we have had spikes in sort of peaks and valleys and different unit growth areas, and we have been able to cover those because of the expanded clean room and the expanded size of the manufacturing folks, anything around regulatory issues that gets a little hairy sometimes. Those can be covered up with a little bit more inventory made by more folks. So, I think strategically, not financially necessarily purely, but strategically, it’s been a really nice answer for us that expansion.

So, if you look back 4 years or 5 years, you guys are north of 20% on the operating margin. And I know you are not going to get there this year, but do you think at some point in the next 2 years or 3 years if the revenue grows now that you have this infrastructure in place, you can get close to that 20% again?

So Jim, if you look at the Q1 op margin, 15%, and then you look at the full year 18%, you obviously got to improve from that 15% and then some to get to the full year answer. So, I think implied in our guidance is some nice improvement on the op margin. We are not giving you the interim quarters, but you can play with it and try and figure out where you would get to. So, I would say, yes, we definitely would expect to get back to 20%. That’s certainly where we want to be and beyond that.

Okay. Alright. Thank you.

Thanks Jim.

Thank you. Ladies and gentlemen that concludes today’s conference. I would like to thank you for your participation. You may now disconnect and have a great day.