Welcome to the LeMaitre Vascular Q4 2021 Financial Results Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir..

Thank you, Vanessa. Good afternoon and thank you for joining us on our Q4 2021 conference call. With me on today’s call are our Chairman and CEO, George LeMaitre; and our President, Dave Roberts. Before we begin, I will 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 risk and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as belief, expect, anticipate, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today, February 24, 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 EBITDA and 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 will now turn the call over to George LeMaitre..

Thanks JJ. On today’s call I’ll cover three topics, Q4 sales, the impact of Omicron, and finally, our continued head count growth, including sales reps and production personnel. Sales were up 5% to $39.5 million in Q4, sales grew 8% in the Americas, and 1% in Europe, while APAC was down 3%. Artegraft and XenoSure led Q4 sales growth.

Artegraft sales were up 16% year-over-year to $6.4 million and we posted records XenoSure sales. We believe Omicron and associated staffing shortages, decreased sales in Q4 as hospitals deferred elective surgeries. At LeMaitre about 10% of our 450 employees contracted the virus in the last three months.

And as a result, we implemented additional safety measures, including work from home, free rapid test, free N95 masks and $100 booster bonuses. And also for a second straight year, our January sales kickoff meetings were virtual. About 95% of our employees are fully vaccinated and will soon offer on campus booster clinics.

We’re currently at a high watermark of 498 employees with most of the increases coming in sales and production. We have 107 reps on payroll today and will likely be adding another ten in H1. In manufacturing, we continue to hire as we recommit to no back orders and combat any potential supply chain issues.

Today is 177 direct labor employees is also a high water mark. Internationally, we continue to grow our sales footprint and our facilities. With the recent hiring of a Korean country manager, we expect to open a sole office in Q2. This will enable us to sell XenoSure in Korea in 2022 and most other products to follow in 2023.

Korea will join Japan, China, Australia, New Zealand, Singapore, and Malaysia as our seventh direct market in APAC. Korea was our second largest distribution market in 2021. In 2021, we also expanded our warehouse and office facilities in Japan, Italy, and England to ensure adequate product supply and timely delivery.

Notably, we install the cryo freezer in our Harford, England facility and in Q1 received UK tissue bank approval for our allografts. The UK will be our third country with an allograft approval. Joining the U.S. and Canada. deliveries to UK hospitals should begin soon.

Despite increased head count and Omicron challenges, we posted a 21% Q4 op margin and end of the year with $70 million of cash. We also increased our dividend for the 11th straight year underscoring LeMaitre’s focus on profitability and cash generation. As you’ve seen, we like to use this cash for acquisitions, dividends, and distributor buyouts.

I’ll now turn the call over to JJ..

Thanks George. Before I discuss the quarter, I’ll say a few words about last year. Sales in 2021 were $154.4 million up 19% versus 2020. The Americas grew 26%, Europe 8%, and APAC 15%. Increases were driven by a full year of Artegraft revenues as well as increased valvulotome and XenoSure sales.

On the bottom line, operating income and net income both grew by 27% in 2021 as sales growth outpaced operating expense growth. We also completed a number of important initiatives in 2021, including restoration of our CE marks progress on our various production transfers.

Hiring 23 sales reps product offering simplifications increasing the size of our manufacturing team and the completion of a secondary stock offering. With regard to our Q4 2021 results, our gross margin in the period was 65.7%. A 70 basis point increase over Q4 2020.

The increase was driven by average selling price increases and favorable sales mix as well as Artegraft purchase accounting charges in Q4 2020. Q4 operating income was $8.3 million, a decrease of 13% versus Q4 2020.

The decrease was driven by increased operating expenses, as we continue to reinvest in sales reps and increase our regulatory spend, particularly as Europe transitions to the new MDR CE mark. In order to reduce our manufacturing, labor, and overhead rates and therefore improved gross margin, we have recently hired about 45 direct labor employees.

As we evaluate our gross margin on an annual basis, it is important to note that in 2021, we incurred significant costs rationalizing our product portfolio. In fact, we reduced our SKUs by 18% in the year and began shutting down for small and underperforming product lines.

These product line terminations contributed to the outside inventory write-offs of $3.8 million in 2021. Additionally manufacturing overtime and increased XenoSure freight cost reduced the gross more margin in 2021. And these two issues should abate in the coming quarters. We ended Q4 2021 with no debt and $70 million of cash and investments.

The $2.9 million cash increase versus Q3 2021 was driven by $10.6 million in Q4 EBITDA and $1.7 million from stock option exercises. After completing the payoff of both our term loan and revolver last summer, in November – on November 30, we canceled our lending agreements.

This eliminated annual charges of approximately $215,000, but a resulted in a one-time below the line non-cash charge of $495,000 in Q4 2021. We like to thank our partners at KeyBanc who’s $65 million loan to us during the initial COVID crisis, facilitated the Artegraft acquisition. Turning to guidance.

We expect Q1 2022 sales of $37.7 million to $39.7 million, which represents an increase of 8% at the midpoint versus Q1 2021 and 10% organically. We also expect operating income of $7.1 million to $8.4 million, which represents a decrease of 3% at the midpoint.

Our Q1 2022 EPS guidance of $0.26 of share to $0.30 per share implies a midpoint of $0.28 per share. EPS in the year earlier quarter was also $0.28 per share. For the full year 2022, we expect sales of $162 million to $166 million, which represents an increase of 6% at the midpoint versus 2021 and 8% organically.

We also expect operating income of $38.5 million to $41.1 million, which represents an increase of 9% at the midpoint. Our 2022 EPS guidance of a $1.35 to a $1.45 per share represents an increase of 12% at the midpoint. With that, I’ll turn it back over to Vanessa for questions..

Thank you. [Operator Instructions].

Vanessa it’s George.

Do you think we should let someone ask a question out there? It seems like there’s a queue and is it time for a question? Is that what we’re trying to do here?.

It looks like we have our first question from Brooks O’Neil with Lake Street..

Good afternoon guys. I have a couple questions, and I appreciate the opportunity to ask them.

So first, you probably read in some of my notes that I referred to something I called the LeMaitre playbook, given all the uncertainties and challenges in the world, would you anticipate any fundamental changes to your execution against the LeMaitre playbook going forward?.

Brooks, first of all, nice to talk to you again. It’s George. Short answer to your question, no, I don’t think we’re going to change our playbook..

Great. Secondly, I’m curious. I think David told me that you guys took another price increase on Artegraft earlier, or either later 2021 or earlier this year.

Could you comment on the reaction in the marketplace to that price increase?.

Sure. It was an 11% price increase in January, and the reaction seems to have been just fine. It was a smaller increase than the year before Brooks, when it was 25%..

Yes. Okay. And then one last question and I appreciate the opportunity again. I noticed, I think you guys announced it 20 million share repurchase program after the close.

And I’m curious as you and David and the Board look out at the acquisition environment versus the opportunity by your stock, would you say you have a particular preference for one or the other, or will just continue to be fairly opportunistic to try to drive the highest ROIC you can generate?.

Brooks it’s Dave, good question. We’re always looking to drive ROIC. I would say, I mean, as you know, I spearhead acquisitions, so we’re always on the hunt looking for good acquisitions and when we find them at the right price, we’ll execute.

But in the meantime it’s basically good housekeeping, good governance to have a share repurchase program authorized. And as the company gets bigger, we found it appropriate to slightly increase the size of the authorization..

Yep. Makes sense. Thanks a lot again, keep up all the great work..

Thanks, Brooks..

Thank you. We have our next question from Scott Henry with Roth Capital..

Thank you. And good afternoon, just a couple questions.

First, could you breakout biologics versus non-biologics in the quarter?.

Sure. Biologics, Scott its Dave here, were 48% of sales and they were up 10%..

Great.

And then could you comment on valvulotomes, how they were in the quarter?.

Sure. Scott, this is George. The valvulotomes had a good quarter. We had three big growers in the quarter Artegraft, valvulotomes and Xeno. I’m scratching for what the percentage growth was, but I know it was one of the top three growers. We’ll get back to you during the call if we find that. Okay..

Okay. I appreciate that. Final question spending levels were a little higher in the quarter, I think, than trend.

Would you – should we think about that as a continuing is or trend line or do you think spending might kind of pull off a little bit?.

Thanks, Scott. Yes, this is JJ. It’s a good question. Yes, a little higher than trend, we’re hiring sales reps and we’re hiring folks in other areas of the business as well, sort of that by bounce back and rebuild from the COVID topics of the last year and a half or so.

And we’ll continue to do that, but there’s a seasonal piece, of sort of Q4 and Q1 as well. So you might expect to see sort of a higher levels around Q4 and Q1 and then sort of tapers off as the quarters move on. So, I would say, yes, that’s the trend that we’ve sort of outlined for you guys.

But you know, cost containment has been a hallmark of the company over time and we’ll keep it a close eye on op expenses as we move throughout the year..

Okay.

And maybe if I could just follow up with specifically on the R&D side, which seemed to be a little more of an outlier in Q4, is that just some kind of noise, like as you mentioned, seasonally, we’re going to see higher and lower quarters or, is there anything going on, focus on R&D or a specific trial that I should be thinking about?.

Right. Scott. I think what I think what you’re seeing inside that number is the continued exceptional expenses around our CE marks. So the MDD CE marks that we were trying to get all of 2021 and we succeeded, and now kicking in is the MDR CE marks, which I would call sort of the varsity level CE marks that you need to get by 2024.

And the spending has begun there. It was a particularly expensive quarter on that stuff. Not necessarily repeated every single quarter going forward, but a lot of the R&D money these days going towards European regulatory..

Okay, great. Thank you for taking the questions..

Thanks a lot, Scott..

Thank you. [Operator Instructions] And we have our next question from Zachary Weiner with Jefferies. .

Hey guys, thanks for taking the question. Couple from me. First on reps, can you give some color on expected product – and how long it’ll take the new reps.

I think you mentioned 10 come in the first half, how long it take them to get up to speed? Are those reps seasoned reps or are they relatively new and I have a couple follow-ups as well?.

Okay. So lots of questions in there. I would say we always get asked that question. We always give a unsatisfactory answer, Zach, and maybe, and this is George, Zach, sorry. Maybe, it feels like it get a great rep they’re up and running in three months. And if some reps never really get going.

And so maybe if I could call it a number like six to nine months, that feels okay to me. They don’t last forever. The turnover rate is something like 16% and that would indicate they’re sort of, three or five year folks. So, you got to get them up and running pretty quickly to make it work for the company.

And then the model that you’re talking about, when we’re looking to put quotas on each of these reps, I’ll give you the U.S. model. I think we’re asking for roughly, and it changes every year, but we’re asking for something like $90,000 to $120,000 in GP addition in the year following, in everyone’s plan every single year.

So something like that would be the model you’re trying to get them to grow business by that much GP every year..

And then any color on, getting back to that high watermark in terms of reps within the company. I think my members correct the high watermark pre-COVID was I think 130, maybe 140.

So any color there?.

Okay. So Zach’s apologies for correcting you, but it’s actually 112 or 114 is our high watermark. So, we are right there and I hope at least two times from now, when we talk to you, we’ll be past the high watermark, but if not the next time we’ll talk to you, we’ll be at the high watermark..

Understood. No, I appreciate the correction.

Shifting gears here just to M&A, I know asked in one of the previous questions, but is there any areas of the business that you look to bolstered more with M&A with Artegraft and the success there is the biologic space still a focus of the company?.

Yes, Zach. This is Dave. It’s a good question. I mean, obviously the biologics portfolio that we have acquired has done quite well for us. So, we certainly continue to look there.

I would say at a higher level, we’re hunting in the open vascular surgery and dialysis access space that’s sort of the main hunting ground for us, but we’ve started to expand a little bit looking at some adjacent markets, for example, cardiac surgery, and we’ve looked at some biologic products there also.

So, I think the theme is open surgery used in hospitals and preferably niche, low rivalry markets with revenue, targets need to have I would say $10 million of revenue or so, or more would be ideal..

Got it. That’s helpful. And if I could just sneak one last one in here.

Pre-COVID the rep access has been, a point of contention through the COVID and then as COVID, you’ve gotten more access, I guess, can you just give a little insight on the access to last portion of 4Q and then, how things are going through the first couple of weeks here in the first quarter, 2022. Thanks for taking the questions together.

We appreciate it..

Okay, Zach, that’s a great question. I’m sure something that’s on a lot of people’s minds. Maybe I answer it in a slightly different manner, rather than using the word rep access. Maybe it’s just procedure volumes and feelings in hospitals.

And I think what we get, what Dave and JJ and I get from our sales reps at our Friday sales calls is that the last week of December, and then the full month of January was the tough sledding spot. And it was driven of course by omicron, but it was even more driven by staffing shortages in hospitals.

Those two things conspired elective surgeries to go down for like roughly that five week period. And then I’m sure you’re hearing this from the other companies as well, but I’m happy to report that. It seems very much so. And we’re 60% USA our revenues. And it seems very much like at least in the U.S. things are very much opening up again.

In terms of February, the full month of February kind of feels like a normal month. And I don’t know how, I know where Omicron grows or I don’t know where the rest of the crisis goes, but it feels very open right now..

Helpful. Thanks for taking the question guys. Appreciate it..

Thank you..

And we have our next question from Javier Fonseca with Spartan Capital..

Hi, thanks for taking my call. Good to speak with you again. Quick question on to, to get more clear as far as the sales force. So as previously mentioned on this call and in the previous earnings call of the high watermark of 112 reps.

My question is, for the end of the year 2022 what is management’s expectation for the number of sales reps or, can you provide any more cloud far as, how much you want, how many more people you want to add to your sales force by the end of that year of this year?.

Sure. Javier thanks a lot. Again, to hear your voice and I’m glad you launched on this thing exciting to have you on these calls. It’s George. It feels like, if we’re at 107, right, this moment, it feels like the company’s trying to land between something like 115 and 120 or something like that.

It is hard though, again, there’s turnover in these sales forces, so it’s not always something that’s at my desk to decide. A lot of people just decide to leave at certain times. So, I would say short answer to your question 115, 120, something like that..

Okay.

And do you have any specific how to say, like drivers or plans to get to that number?.

Very much so. Yes. I mean, we mentioned on the call today that we think another 10 we’ll get hired in H1. So you could add 107 plus 10 and get to 117 also sort of breaking that down. We have four reps that are signed right now that, that don’t work here yet.

So that’s 111, and then we have 10 more requisitions out there where the rep hasn’t signed, they’re coming on. So, it’s, happening. And we’re very, particularly in the U.S., I’d say we’ve been very aggressive about we built out to 62 territories this year in our USA plan, and we’re chasing that. We’re trying to make that happen.

We have to watch our nickels and dimes here as well. We try to have a profit around here, but that’s been one of the focus areas of the company is to build back to sales force..

Awesome. Thank you so much..

Thanks a lot Javier..

And thank you. I’m standing by for further questions. And that concludes our question-and-answer session. And thank you, 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..