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 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, 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 and 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, JJ. 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. Finally, number three, our sales footprint continues to grow. We posted record sales of $42.1 million in Q2, an 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 U.K., and we continued 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 have begun prepping for a 2023 Artegraft CE filing. Rep headcount stood at 111 on June thirtieth, 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 expensive, our network of 12 sales offices is meant to put our medical devices as close to hospitals as possible, and we continue to go direct worldwide. In terms of activity level, we're seeing surgical conferences 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 JJ. 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 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. In another effort to improve our gross margin, in June, we closed our factory in Saint-Étienne, 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 Saint-Étienne 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-$41 million, which represents a reported increase of 4% at the midpoint and 10% organically. We also expect operating income of $6.8 million-$8.2 million, which represents a decrease of 17% at the midpoint. Our Q3 2022 EPS guidance of $0.24-$0.29 per share implies a midpoint of $0.27 per share. The full year 2022, we are increasing our sales guidance to $162.7 million-$165.3 million, which represents an increase of 6% at the midpoint and 10% organically. We also expect operating income of $29.5 million-$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-$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. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Zach Weiner with Jefferies. Your line is now open. Hey, everyone. Thanks for taking the questions. First one from us, just a question on how the supply chain is being impacted. We've heard through the, you know, first bit of earnings here, some companies talk about supply chain impacts. Any impact on from you guys? Hi, Zach, thanks for the question. It's George. I would say generally not. We, you know, we've been trying to be looking ahead and hiring a lot of direct labor employees to be able to point employees at manufacturing certain products. In general, I don't think that's something we're gonna be talking about too much on this call. Yeah. Just more forward looking, you know, as risks and conversations around economic downturn or recession, whatever term you wanna use, you know, you guys have talked about increasing your hiring plans through this year. Any plans of, you know. Will the recession risk impact hiring in outer years? I mean, I can't, I don't think I could 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. All right. Thanks for the questions. Thanks, Zach. As a reminder, to ask a question, you will need to press star one one on your telephones. One moment for the next question. Our next question comes from Brooks O'Neil with Lake Street. Your line is now open. 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? If I did the math right, what would you attribute that to? Yeah, Brooks, thanks. Thanks for the question. Since last guidance, you know, the EPS is down a little bit. I would say, you know, the special charge was a little higher than we thought. 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. Maybe, you know, that's part of that answer, as well. You know, the FX topic is always around us on this. Since our guidance, I think FX hurt our top line by about $600,000. Maybe half of that answer is sort of going to the bottom line as well. There's another headwind for you. In Q2, if you look at our Q2 guide versus actual, we were over by about $600,000 for that. 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 operating margin in Q4 rebounds and we're at 22%. I think it's safe to sort of imply in there that, you know, 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 operating margin in Q4. Yeah, that's great. 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, you know, they're separated in three pieces. One is building back the sales force. We were at 112, you know, before the pandemic, and now we're at 111. So we're still going 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 preempt any supply chain disruptions. So we should get a better hourly labor rate on that. you know, 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're 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. three types of bodies there, and we're hiring a lot of them. Yep. Okay, that's good. The last question for me, obviously, the cash build up is very impressive. I'm curious how you think about capital allocation? Obviously, the acquisition environment must be pretty attractive in the current, you know, overall macro environment we see. There might be some other things you want to spend the money on too. Yeah, Brooks, it's Dave. Thanks for the question. Obviously, the cash balance as JJ mentioned. In terms of capital allocation, we have our dividend, which we've increased 11 years in a row. We're in the Dividend Achievers Index. Of course, really the excess cash, the growing cash balance is aimed at acquisitions. I would say valuations, certainly obviously led by the public markets, which peaked in MedTech maybe about 10 months ago. We see the valuations coming down. Usually, there's a lag in the messaging between the public markets and sellers, whether they be public carve-outs or privates. We do think valuations are slowly coming down. We saw that PE firm take Natus private for less than 3 times sales. You know, we think that's happening. Yeah, our team is out hunting, as we always do for these, you know, core open vascular products, disposables and implantables with, I don't know, $10 million or more of revenue, ideally in niche-y low rivalry markets. We're out hunting, we have a pipeline and, you know, but things have to go correctly for us to pull the trigger. We're still doing our thing. Absolutely. I get that. I lied. I have a couple more quickies, just real fast. One is, are you guys comfortable letting the Biologic percentage of the total revenues keep creeping up? Or is that a focus, or would you seek to balance that? 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 the Biologics Patch. 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 Biologics space. We've been not just acquiring in this space, but we've been investing in additional regulatory approvals. Of course, Biologics, I think, you know, most listeners know, are better at fighting and preventing infection than synthetic implants. They have better handling properties. Yeah, you know, we're thrilled to have 50%. That being said, it doesn't mean that, you know, the next product line or 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. Brooks, as to your share repurchase question, of course, I probably wouldn't tip my hand as to when we're gonna 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. We're sort of tied up to that right now. I think today the stock is at $48. You know, it would be a little odd for us to take the action of selling those shares then just run back and use it as a buyout facility or a repurchase facility at $48. We'll never. I don't think you'll ever catch us guiding on that topic. 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 open. Hi, this is Prerana 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 know, you're right to outguess that I probably don't wanna 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 wanna dip into 2023 until I have to. Okay, thanks. 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 the strong dollar reduced sales by $1.7 million during this quarter? Yeah, thanks for the question. For the full year-over-year, we think it's about a $6.2 million impact. You know, the euro going from basically 1.18 to 1.05, full year versus full year. 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. You know, I'm sure you've been hearing this in all of your other companies, but it's a big topic for us. You know, 40% of our sales-ish outside of the U.S., a lot of that in euro-denominated, but the yen really getting weaker against the dollar as well. 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. Hey, 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, kinda your confidence in trajectory of gross margin back into that high 60s%, you know, low 70s% over the next, you know, couple of years. I don't know about the next couple of years, but I'll speak through this year and generally trends of what's going on in gross margin. I generally think, you know, more specifically in the current quarter and the sort of guided quarters, there's a couple nice trends going on. One is our E&O has sort of gotten a little more tame these days, and I think slash believe it will be in the coming quarters. So that's sort of nice. In addition, we've hired, as George mentioned, and I think I mentioned in my piece also, a bunch of DL folks, and this is gonna help the margin as we get into the back part of the year. As we hire more folks and they make more units and absorb the same amount of fixed costs, we should be getting sort of more improved margins on that. In addition, we're working on internally some nice cost cuts in and around the cost of goods sold line. In different areas of our COGS business, we're looking at some nice important cost cuts that we think bear some fruit back half of the year as well. I would say that's some sort of nice trends there. Going forward, more broadly, I would say you know, price hikes are something that we do pretty regularly in January, as you know, maybe averaging 4% or 5% a year, having selling price hikes. You can certainly think that that's gonna, 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, yeah, we're starting at 65.6% in Q1. Now we're saying 66.7 for Q3 and then 67.5 for Q4. It is a nice cadence. We think it's doable, and we think we have some nice, dynamics internally to get there. Okay. Excellent. Just a follow up question on the Biologics. You know, it seems as if like there's more of a focus on it on this meeting, 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 over, like, the last, you know, year or so? I mean, this is George, sort of following up on Dave's answer previously. Yeah, in general, 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 with 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. Hey, guys. A few questions. I'm assuming JJ, based on what you just said, and you sort of listed some of the reasons, you have some confidence in the positive gross margin guidance in the second half. I'm assuming there's no contemplated price increases between now and your traditional January. Is that fair? 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 hikes. Is that the way you guys see it going? Yeah, yeah, Mike. I mean, it has been a topic with all the inflation issues going around. Do you do something sort of midyear and take another price hike? I think we've decided, at least up until this point, and, you know, things could change, but I would say probably not, but they could. But we've decided, no, we're the annual price hike guys, and that's our. That's sort of our MO, and we'll continue to do that. I don't think you're gonna see that back half of the year. Mike, maybe the bite was pretty big this year. I think we're thinking it's about 8% or something like that. 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. Well, that bodes well for the, not only the next couple quarters but then beyond that. A question around the hiring you've done for MDR. Is there any way to put a number on what that's cost you to this point, and then sort of what you think between now and May of 2024 that could cost you incrementally? I'm not sure I wanna go into 2023 and 2024, 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, it's regulatory approval stuff. That's, it's a big number. Does anyone have the quarter-over-quarter in regulatory number for Mike? Maybe that's a help. Or even all R&D since 60- All R&D, Mike, was up about $700K or 26%. Within that, regulatory was up about $500K or 28%. Got it. The other two, they were up markedly as well, but regulatory being the big piece of that. It's, 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. 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. We're sort of done, if you wanna divide the story up into the old-fashioned story, the MDD story, we're now sort of done with that thing. 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. Could I just ask, and again, I'm, I guess I'm not, you know, wanting specific guidance, but I'm trying to get a handle on, you know, 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- Right Roughly around 8% as we move forward? Okay. Yeah, I'm not gonna 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 place you'd put money probably is in growing out the sales force and making sure that you get those MDRs approved. Yeah, sort of working on that towards a 9%, I guess. I haven't really thought about the exact number. But yeah, if you wanna 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. We went into the year trying to get to 9 of each of those, and the goal was 9, 9. We're now saying, "Oh, we should be 10, 10." Our 2025 plan set, Mike, we do five-year internal plan sets, it's trying to get to 14, and 14 with those three types of engineers. I call out those engineers 'cause they're the expensive bodies in R&D, and they're also the things that would help us get the MDR, so it's relevant to what you're talking about here. Yeah, we continue to push hard on this topic for sure. You can't. I, $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. 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? Yeah. We had the one-time special charge of $3.1 million. Okay. That's essentially why that spiked. Yeah. We couldn't get the benefit from that, Mike. It didn't benefit our tax rates. It actually lowered pre-tax, but the tax rate was effectively as if that never happened. The effective tax rate is actually higher. Okay. Going forward though, you go back into the mid-20s? Yeah. We should normalize. Okay. Yeah. All right, guys. That's all I've got. Thank you. Hey, Mike. Yep. Can I give you your numbers now instead of later? Okay. Do you not want them? No, I definitely want them. All right. Depreciation and amortization, $2.507. Stock-based comp, $1.138. CapEx, $940K. Thank you so much. You saved yourself a tax preparer. You bet. Thanks, Mike. Bye. Thanks, Mike. One moment, please, for our next question. Okay, our next question comes from James Sidoti with Sidoti & Company. Your line is now open. Hi, good afternoon, and thanks for taking the question. Just, two from 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 going over into the third and fourth quarter? Yeah, there'll be little dribs and drabs, Jim. Maybe $100K or so. Point, or could there be additional charges going over into the third and fourth quarter? Yeah, there'll be little dribs and drabs, Jim. Maybe $100K or so next quarter, and then maybe $50K-$75K for a few quarters after that. Nothing that pops up like it just did in this quarter. We basically accrued everything we knew about, and then there's some things that you know, you have to wait to put them through the P&L or you don't know them. Right. 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 can 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 type items, not for approval items. No, there's no sense of a clock over there. We've heard rumors that it takes about 2 years. Remember, this is a clinical trial. We've worked for 4 years now to get to that filing. I feel if you're partly asking how long does it take, our guess is as good as anyone's, we feel like it's 2-3 years here. All right. Then just, you know, on the big, big picture, it just feels like organic growth is accelerating into the back half of the year. Would you attribute that to, procedures, you know, more procedures being done, or are the sales folks you hired already starting to contribute? Okay. 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 this slow lifting of the COVID topic around all of the procedures. Thirdly, you remember that in Europe last year, we had all these MDD problems, and those are now with the Omniflow approval, June thirtieth, those are all now gone away, and so we get a nice lift. 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. Those three things are helping us in the year. You know, it's great to be back in the tens and elevens. It's 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 my question. My question is around Artegraft. You know, knowing that this is the largest acquisition of the company, and it seems to me there's still a lot of room to grow. Could you provide more color as far as going forward, any price increases or any tailwinds that could like really show the continued performance of Artegraft as a top product from LeMaitre? Sure. Okay. 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. This year we're using as an opportunity to get our ducks in order to get that filing ready to go. In 2023, we anticipate making the filing to the notified body, and maybe that gets approved in 2024 or 2025. I think that's the big shot on goal. There's also a Canadian topic at some point, although we haven't really fleshed out our plans 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. Hey, guys, just one quick follow up. I know you announced last quarter the closing of the plant in France, and you teased out the numbers there. Any plans for additional plant closings that we should be ready for or watching for over the next, you know, six months or so? Sure. Zach, thanks a lot. It's a good question. We only have two factories remaining, one's in Chicago, one's in New Jersey. Definitely feel like over time, we've been trying to always give the employees the heads-up about whether we're gonna close a factory or not before Wall Street. They'd be the first guys to hear, and we have not said anything to any of them about this at all. For now, nothing. 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. You may now disconnect. Have a great day.