LeMaitre Vascular, Inc. (NASDAQ:LMAT) Q3 2023 Earnings Call Transcript

LeMaitre Vascular, Inc. (NASDAQ:LMAT) Q3 2023 Earnings Call Transcript November 1, 2023

LeMaitre Vascular, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.31.

Operator: Welcome to the LeMaitre Vascular Q3 2023 Financial Results Conference Call. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Joseph Pellegrino: Thank you, Operator. Good afternoon, and thank you for joining us on our Q3 2023 conference call. With me on today’s call is our 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, November 1, 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. 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.

George LeMaitre: Thanks, J.J. Q3 was an excellent quarter. Q3 was similar to Q2 on the top-line, with 16% organic sales growth. But it was better on the bottom line. Through the year, we’ve gained control of op expenses. Spending growth was 26% in Q1, 19% in Q2, and now 14% in Q3. As a result, op income grew 49% in Q3, and EPS was up 36%. Reported sales growth was 21% in Q3, spread across all geographies. APAC was up 30%; EMEA, 24%; and the Americas, 20%. By product, bovine patches were up 22%; valvulotomes was 27%; bovine grafts, 15%; and carotid shunts, 24%. Our bovine patch and carotid shunt businesses continue to excel in Q3 as key competitors have left the market. Valvulotome growth might be due to the recent publication of the BEST-CLI trial, which showed superior results of vein bypass versus stents, angioplasty and endarterectomy.

Hospital procedures remained elevated in Q3 as the 2023 return to hospital continued, and our January 1st price increase has largely been accepted. In the time of high inflation, supply chain disruptions, and the CE mark transition, hospitals are now more attracted to our longstanding no-back order as promised, and price might have become a secondary topic. Our 16% organic sales growth in Q3 was 11% price and 5% units. Feed on the street and our growing international presence also helped. We ended Q3 with a record 136 sales reps, 15% more than a year ago. We generally have posted higher sales growth rates internationally as we keep entering new markets. LeMaitre’s new Bangkok office opened in August and we began selling directly to Thai hospitals.

We also opened a new expanded Madrid office in September, and now we’re planning a French sales office for H1 2024. France is our 6th largest market. For a company with a French name, it’s a bit odd that we’ve never had a dedicated French sales office. Paris will be our 14th sales office and will now be able to serve the 5 largest European countries with dedicated customer service reps in their country and their languages. Previously, our European customer service reps were centralized in Frankfurt. This re-localization of customer service tightens our hospital relationships and likely increases sales. Important regulatory projects underway include our Artegraft and RFA filings in Europe as well as our two Chinese XenoSure filings for cardiac and peripheral.

It’s likely that all four of these fillings will be at their respective regulatory agencies by H1 2024 and would expect approvals 2 years after that. In H2 2024, we’ll also follow for Artegraft approval in Canada and Australia. These filings are in addition to the MDR CE transition in Europe. As you may know, Brussels has extended the MDR deadline to 2027. We have approximately 17 product categories needing this new CE stamp or letters to file, so this is a considerable undertaking. To conclude, 21% sales growth in Q3 and 49% op income growth resulted from price increases, restrained op expenses, and the continued return to hospital by patients and staff. Our profitability and $97 million of cash on hand provide safety and strategic optionality.

With that, I’ll turn it over to J.J.

Joseph Pellegrino: Thanks, George. As George noted, operating expenses in Q4 2023 were up 14% and operating expense growth has slowed from 20% to 25% in H1 to under 15% in H2. If the sales force ramp and post-COVID re-hiring was our mantra in 2022, it’s safe to say that hiring restraint and cost containment has been our 2023 theme. We had 450 employees at the end of 2021, 591 at the end of 2022, and now 613 at the end of Q3 2023. One of our notable internal goals throughout 2023 was to finish the year with fewer than 625 employees. This target seems achievable. Increased sales and cost constraints has improved bottom line considerably. In Q1, operating income growth excluding special charges was 3%, it was 8% percent in Q2, 49% in Q3, and now we’re guiding 44% in Q4.

In Q3, we posted a gross margin of 65%, up 80 basis points year-over-year. The increase was driven by average selling price increases and direct labor productivity improvements. The benefits of a larger and more efficient manufacturing team are starting to come to the P&L. In retrospect, our 2022 manufacturing hiring surge was well timed with the global return to hospital of patients and staff. Units are up and back orders are down. Cash at the end of Q3 2023 was $97 million, an increase of $6.8 million in the quarter. This increase was driven by cash from operations of $11.8 million, which is partially offset by dividends of $3.1 million and capital expenditures of $1.1 million. For guidance, please see our business outlook issued in today’s press release.

But a few Q4 highlights include: reported sales growth of 20%; organic sales growth of 16%; operating income growth of 44%; and EPS growth of 43%. This $600,000 upward revision to our Q4 operating income guidance is largely due to an improved gross margin and tighter expense control. Separately, we have lowered Q4 sales guidance by $1.5 million due to three topics, which have evolved since our last guidance, the strengthening dollar, RestoreFlow output constraints, and the continued U.S. export ban on sales to Russia. And Finally, I would like to welcome two new analyst teams to the LeMaitre story. In September, Suraj Kalia and Shaymus Contorno from Oppenheimer initiated coverage. So, in October, David Turkaly and Danny Stauder from JMP initiated coverage.

Thank you to both teams, and we look forward to working with you. With that, I’ll turn it back over to the operator for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question is going to come from the line of Brooks O’Neil with Lake Street Capital Markets. Your line is open. Please go ahead.

Brooks O’Neil: Thank you. Good afternoon, everyone. Congratulations on a terrific quarter. I’m curious, I guess I’d like to ask David, if you don’t mind, if he could comment at all on the M&A environment. It seems to me like the cash balance is robust and perhaps some of the challenges that are affecting the world may be freeing up some tasty morsels from some of the big medical companies out there with whom you talk. Any update would be helpful? Thank you very much.

David Roberts: Hi, Brooks. And thanks for the question. Yeah, obviously having a building cash balance is very helpful. In the quarter, we increased the cash of $6.8 million, and we’re up to $97 million. When you combined that with our over $40 million of EBITDA, it gives us a pretty big war chest to go after acquisition. In terms of the environment, I would say, of course, valuations are down. They’re up about 20% since our last call on August 1. And small- and mid-cap companies, as you know, are trading at less than 3 times EV [ph] to next 12-month sales. So in terms of public multiples, the valuations have come down. I think it always takes private sellers a little while to digest and get the email. But, yeah, so that’s the environment in terms of targets, I would say, we’re continuing to stay disciplined, focusing primarily on targets in the middle of the fairway, which are these open vascular targets with more than $5 million to $10 million of revenue.

We like these niche open vascular markets. But we have been hunting adjacently, I’d say probably more a little bit in the cardiac surgery market. And we have ongoing discussions at various stages with different potential sellers. And so, we’re out hunting. We know it’s been a little while since we’ve done an acquisition a little over 3 years. But we’re waiting for a deal that we feel really good about that deserves our capital. So, we’re out hunting and at some point you’ll see something pop out of the toaster.

Brooks O’Neil: Great. Thank you very much. Congratulations again on the terrific quarter.

George LeMaitre: Thanks, Brooks.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Michael Petusky with Barrington Research. Your line is open. Please go ahead.

Michael Petusky: Hey, good evening. And J.J., sorry if you mentioned this, I did not catch it. Did you mention cash flow from ops in the quarter?

Joseph Pellegrino: In the quarter, it was $11.8 million, if I recall. Let me check that, Mike. Yes, it was, [$11.821 million.] [ph]

Michael Petusky: Okay. All right. Great. And let me just follow-up on Brooks’ question around M&A real quick. Dave, obviously we’re hearing more targets, more attractive targets, but also cost of capital is materially up as well. So I’m just wondering how you guys, how you MBAs think about the cost of capital and especially what that means for larger deals. Obviously, your balance sheet and cash flow support, smaller or maybe even mid-sized deals, but you guys have repeatedly suggested, “Hey, we had great success with Artegraft, more than open to larger deals.” How does cost of capital and larger deals sort of compete to you guys at this point?

David Roberts: Yeah, I would say obviously the cheapest form of capital is the cash on the balance sheet. If we’re up near $100 million in cash on the balance sheet at the moment, we probably have $80 million of dry powder. And when you put that in the bank and earn a 5% money market return, it’s not that expensive. So I would say, of course, we’ll use our cash first. And secondly, absolutely debt is more expensive than it used to be, but it’s cheaper than using our own equity. And so we go to that next. And as I mentioned, the EBITDA is north of $40 million, probably you get to easily borrow 3 times that, and that’s excluding pro forma EBITDA. So we normally do accretive acquisition. And so the borrowing capacity could be higher.

Of course, in this environment, we’re not going to over lever the balance sheet. And then, I would say third, and I’ll let J.J. to add any color when I’m done on this. Third would be issuing equity that would have to be a much larger deal. Of course, our resolve would have to be much, much higher. There are deals out there, where I could picture doing that. There aren’t that many, but there are some. So that for me, I guess, would summarize the pecking order of how we would access capital to do larger deals.

Michael Petusky: Okay. Great. And I guess, George, you mentioned that some key competitors have left some markets in which you guys compete. Could you sort of tease out whatever details you’re willing to share there? Thanks.

George LeMaitre: Yeah, of course. And one of the – they’re both sort of old stories here. Maybe one is a year-and-a-half old, maybe one is half-year old, but Becton Dickinson has completely left the shunt market over in Europe. Drag down by Europe, they’ve done it for the whole world. So they’re out of the shunt market. And I would say they were either the key competitor or the second competitor over there. So our market shares over in Europe and shunts are now approaching 70s, 80s, and 90s in the various countries over there. And then in the bovine patch world, we’ve had one Canadian guy, BioIntegral, has been taken off the market. They could not re-up their CE marks and then Abbott has left the large patch, more the cardiac patch market.

And that is providing crazy growth rates for us in our cardiac patch market. That product line for us is called CardioCel. You’ve heard us talking for years about the product, XenoSure. That’s more the peripheral patch and CardioCel is more of our cardiac patch. And of course, the new Aziyo patch is also a cardiac type patch.

Michael Petusky: And since you mentioned it, before I jump off the Aziyo partnership, I mean, how you guys have now, I guess, been involved in that at least a couple of 2, 3 quarters. It feels like, how is that working out? Any commentary just around that relationship? Thanks.

David Roberts: Yeah, Mike. It’s Dave. I’ll take that. I’d say it’s going fine. The sales are probably running a little bit less than what we provided as guidance on the last call. I would say that, as we look here over the next couple of few months, at the moment our North American, our U.S. sales organization is compensated really outside of their quota system on this patch and starting in January, the patch will be included in their quota. So we’re sort of interested to see, will that affect the revenue? Let’s see how that affects or doesn’t affect that revenue. But the good news is, we’ve got 6 months at least to think about whether we want to acquire this. But soonest, we could exercise that option would be in April of next year.

And as I learned way back in business school, you should never tell a live option. So we’re thinking about this, right? And then, if we do exercise it, it would certainly be accretive, right? And so, it’s something we’re paying very close attention to. But at the moment, I know you’re not asking this. We don’t have further thoughts about would we exercise it or not. But, yeah, I would say it seems to be going well. One spin-off benefit is, as George mentioned, it’s used mostly around cardiac surgery. We picked up a lot of customers, a couple of hundred customers, which has helped us actually sell some of our other cardiac surgery products. So there’re some nice spin-off benefits occurring as well.

Michael Petusky: Okay. Terrific. Thank you.

George LeMaitre: Thanks, Mike.

Operator: Thank you. And one moment as we move to our next question. And our next question is going to come from the line of Jim Sidoti with Sidoti & Company. Your line is open. Please go ahead.