Q1 2023 LeMaitre Vascular Inc Earnings Call
Participants
Dave Roberts
George W. LeMaitre; Chairman & CEO; LeMaitre Vascular, Inc.
Joseph P. Pellegrino; CFO, Treasurer, Secretary & Director; LeMaitre Vascular, Inc.
Brett Adam Fishbin; Senior Equity Research Associate; KeyBanc Capital Markets Inc., Research Division
Frederick Allen Wise; MD & Senior Equity Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division
Michael John Petusky; MD & Senior Investment Analyst; Barrington Research Associates, Inc., Research Division
Scott Robert Henry; MD, Senior Research Analyst & Head of Pharmaceuticals Research; ROTH MKM Partners, LLC, Research Division
Presentation
Operator
Welcome to the LeMaitre Vascular Q1 2023 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.
Joseph P. Pellegrino
Thank you, Operator. Good afternoon, and thank you for joining us on our Q1 2023 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, May 2, 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 W. LeMaitre
Thanks, J.J. Sales grew 22% organically in Q1, 13% price and 9% units. Our 5 largest product lines led the way. Valvulotomes were up 29%, carotid patches increased 17%, bovine grafts 22%, allografts 42%, and carotid shunts 18%. By geography, all 3 regions reported growth. The Americas were up 21%, EMEA was up 17% and APAC was up 6%. At least on the Q1 sales line, it felt like we were in a new movie, Everything, Everywhere, All at Once.
The growth was partially driven by the improving macro environment you've already heard about. Procedure volumes increased in Q1 as hospitals staffed up their ORs to pre-COVID levels. But we also saw growth from 3 LeMaitre-specific items. Pricing, a larger salesforce, and competitor stumbles. In Q1, we realized a 13% price increase largely from our domestic Valvulotomes and European shunts. We also had 128 sales reps on March 31, 14% more than we did a year ago, and we plan to end the year with 135 to 140 reps. And finally, in Q1, we benefited from competitor stumbles, which came in 2 flavors, backorders and abandoned European MDR approvals. While many of the backorders have resolved, several competitors have withdrawn their products from Europe due to the high cost of gaining next-gen CE marking.
I'd now like to give an update on our continued expansion efforts in Asia Pac. Our new office in Seoul is up and running. Korea sales are trending above previous expectations, and we should post a 2023 topline of $1.5 million. This is about double the historical sales volume to the ex-Korean distributor. This subsidiary should also turn a small profit in 2023.
Additionally, we recently agreed to buy out our Thai distributor and plan to begin selling directly to the Thai hospitals in Q3. This will be our 29th direct market.
In other APAC-related news, in Q3 we expect to receive Japanese approval for an additional XenoSure indication for use in the carotid artery. Our Q1 annual run rate for XenoSure in Japan is $1.9 million, so this additional indication could be meaningful. Currently, our Japanese salesforce markets XenoSure only for use in the femoral artery, whereas worldwide usage of XenoSure is typically in the carotid artery. With that, I'll turn it over to Dave.
Dave Roberts
Thanks, George. On April 20, we signed a 3-year agreement with Aziyo Biologics to be the exclusive distributor of their cardiac patch product line in the U.S. with an option to acquire the worldwide business during year 2 or year 3. Excluding the initial inventory purchase, there was no upfront payment. 2022 U.S. sales of these products were $6.8 million.
We now have several patches in our portfolio. Perhaps some clarification is warranted. XenoSure is a first-generation bovine patch used primarily by vascular surgeons. CardioCel is a second-generation anti-calcification bovine patch used by cardiac surgeons. Aziyo is a third-generation porcine patch designed to be resistant to infection and to remodel into healthy tissue. Aziyo is used primarily by cardiac surgeons. LeMaitre expects to record Aziyo sales of $800,000 in Q2 and $3.8 million in the full year 2023 with a 50% gross margin. With that, I'll turn it over to JJ.
Joseph P. Pellegrino
Thanks, Dave. Q1 2023 sales were $47.1 million, an increase of 19% on a reported basis and 22% organically versus Q1 2022. We are now guiding 15% organic sales for full year 2023 as we expect sales growth to moderate as hospital procedure volumes may begin to normalize.
In Q1 2023, we posted a gross margin of 65.6%, flat versus the prior year period, as average selling price increases and manufacturing efficiencies were offset by FX headwinds and unfavorable product mix. Going forward, the addition of the Aziyo product line will decrease our gross margin by about 0.50%.
We increased our direct labor manufacturing team by 54% in 2022. This increase in personnel has already helped us mitigate issues related to the MDR transition, product line changes, and supply chain disruptions. Training of this larger staff has driven inefficiency, however, which has hurt the gross margin, although we have begun to see improvement in this area. Gross margin guidance is 65% for the full year.
Q1 2023 operating income was $7.9 million, reflecting an operating margin of 17%. Operating expenses increased 28% in Q1 versus the prior year. Much of the increase was due to higher selling commissions as Q1 sales significantly surpassed sales quotas. In addition, we had 16 more sales reps versus the prior year and resumed our 3 regional January sales meetings. Regulatory costs were up 47% in the quarter as we continue working to obtain our MDR CE mark. We expect to slow the growth of operating expenses as we move through the year. Indeed, headcount of 591 was flat from December 31, 2022 to March 31, 2023. For the full year 2023, we expect an operating margin of 18%, and EPS growth excluding special charges of 17%.
For guidance, please see our business outlook issued in today's press release, but a few highlights include reported sales growth of 15% in Q2 and 18% in the full year. Organic sales growth of 13% in Q2 and 15% in the full year. Reported EPS growth of 103% in Q2 and 29% in the full year. And non-GAAP EPS growth, excluding special charges, of 10% in Q2 and 17% in the full year. With that, I'll turn it back over to the Operator for questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question will come from Matthew Mishan of KeyBanc.
Brett Adam Fishbin
This is Brett Fishbin on today for Matt. Just wanted to start quickly on the quarter. You definitely touched on 3 of the key drivers at a high level, driving some of the outperformance on the top line. Just wondering if you could expand a little bit on what you were seeing specifically in the Americas and EMEA. Maybe around what type of procedural trends took a step up versus expectations. And then like maybe where else you were just surprised versus the outlook coming into the year.
George W. LeMaitre
Brett, this is George. Thanks for your question. Actually, you guys, the KeyBanc team, sends around a fantastic report about the credit card swipes that take place in these hospitals. And when we looked at that, I think it sort of says it all. There were 14% more key bank credit card swipes in Q1 in USA hospitals if I got this right, you're welcome to correct me by the way since you sent the data out, versus Q4. It was a very strong sequential change between Q4 where we sold $41 million worth of medical devices, and Q1 where we sold $47 million worth of medical devices. And again, I think were 68% Americas. This is where it happens for us, and I think your data captured a lot of what's happening. The hospitals are open for business and doing procedures.
Brett Adam Fishbin
All right, that's really helpful. And then I was also just looking ahead at the guidance, a pretty nice step up. It seems like to me, a lot of the upside in 1Q might have been driven by volume, just based on how you quantified it, maybe some upside on the price side as well. But is that something that you expect to continue in terms of what's driving the increase in guidance? Like are you seeing -- are you expecting an uptick in actual volume versus the initial outlook?
Joseph P. Pellegrino
Yes. I think for the full year, if you're thinking of the drivers, the pricing topic probably sticks with you in one form or another. It may not be 13% quarter-in and quarter-out. There's a mix issue underneath that. That seems particularly robust to me, so maybe it's not quite that, maybe it is, but we'll see. But the hospital procedure piece, I think we're assuming that there's going to be some return to normalization over time. There'll be a little bit of a step down in that. Maybe there was a backlog topic in Q1 and you sort of worked through that in Q2 and Q3. Elevated levels still, but not like you saw in Q1. And then the third piece for the full year is the Aziyo distribution agreement. $3.5 million to $4 million of sales may be coming from that in the year. I think those are your big chunks as you think of guidance for the full year.
Brett Adam Fishbin
All right, really helpful. And then actually, last question, just to clarify the point, I know there was a little bit of a tailwind expected from some of the Omniflow backorders and you thought that it would be resolved by the end of 2Q. Could you possibly like quantify how much of a tailwind that was this quarter if you still -- and if you still expect it to go away next quarter? Thanks very much.
George W. LeMaitre
Sure. Thanks a lot. Omniflow grew year-over-year in Q1, 1% on a reported basis and 4.8% on an organic basis, so a little bit of a year-over-year tailwind. And then specifically on the backorder, things are improving. I would say largely we're still holding to that estimate that the backorder will be cleaned largely by the end of Q2. But for some real facts here, approximately at the beginning of this year, we came into the year with $800,000 in Omniflow backorders and we ended Q1 with $400,000 in backorders. We pushed an extra $400,000 through to cut that backorder. But again, to go year-over-year here, it was up 1% reported. It didn't really help us at all, but it was nice to not be suffering like we were in Q4.
Brett Adam Fishbin
All right. Thanks very much. I think that probably clears up that not too much of the beat was driven by that or anything onetime. Thanks again for taking the questions.
Operator
And our next question will come from Rick Wise of Stifel.
Frederick Allen Wise
Apologies, George, I am juggling 3 calls tonight and I missed the very start of your comments. But I want -- maybe you commented on it, but I wanted to touch on the salesforce. You had 131 reps at the end of the year, you have 127 this quarter. I assume just normal attrition. But what are your thoughts about this year? And do you have the right number? And if this is the right number, does that suggest all things equal, and I appreciate there are a lot of moving pieces here, maybe a little more operating leverage as the year unfolds?
George W. LeMaitre
Right. One of the things that we're saying here, Rick, is that we have 128 reps right now, we had 131 at the end of the year, and we continue to plan to be around 135 to 140 for the year. There's still let's call it 7 or 9 more reps that will be sitting on the P&L by the end of the year. If we're looking for leverage, I don't know if we'd get it there, but that's not that many. That's an addition of, I don't know, 7% or 8%, if that's part of your question. I mean we do have op margin keyed in for the year at about 18%, and I think -- for the guidance, and I think we had -- we posted a 17%. Am I doing that right, in Q1? And so, Rick, short answer to your question, there's a little bit of leverage here. The other key fact here I think that we wanted to focus on is that we ended the year with 590 employees, and at March 31 we only had 590 employees also. The slowing down of headcount growth, not just reps but all headcount, really began about October, November of last year. We stopped approving hiring requisitions largely. We're slowing down and I think we're knowing we need to get better leverage at the end of the year than what you're seeing in the Q1 report.
Frederick Allen Wise
And maybe a question for Dave. Dave, that was a great quick and certainly clarifying perspective on the patch versus second, third gen. And I'm clearer now about the Aziyo patch opportunity. Can you give us some clarity on the potential opportunity and what you think you're going to be able to do with the product maybe that hasn't been done? Or just is it about you have more reps, you can be more effective? Just any more color there that helps us appreciate, better appreciate the opportunity.
Dave Roberts
Yes. Sure, Rick. Thanks for the question. Aziyo had -- was selling these patches primarily through their own relatively small to LeMaitre direct sales channel of maybe about a dozen or so reps. Plus they had a handful of independent agents. But that channel was selling primarily a different and very interesting product they have which is used in EP, which is a biologic pouch. And so really for them, it was a strategic choice to focus their sales teams' efforts on that product. They were looking for a home and they recognized that LeMaitre has a relatively large salesforce in the United States. We have 64 sales reps in the Americas, probably about 58 or so U.S. salespeople. And of course, we're very familiar with the patch space with XenoSure and CardioCel selling both peripheral vascular and cardiac surgery patches. We just felt like it was a really good combination. It's a very interesting patch. When it's implanted properly, it resorbs in the body, which can have a lot of benefits, and neither one of our patches does that. It's a very good fit and we're very pleased to have signed a distribution agreement. We have an option to acquire that you're aware of, and yes, we're excited to see where it goes.
Frederick Allen Wise
And does this deal in any way preclude you from pursuing other M&A? I know that you're always anxious to share with us your specific plans.
Dave Roberts
No. First of all, the transaction is complete now. We actually didn't put any upfront cash into the deal, so it didn't really affect the balance sheet at all. In fact, we expect it to be accretive as we've described, and so if anything, it should improve our balance sheet for future deals. Something that's interesting is it came with a fairly large number of customers, which always is good in terms of when we do future acquisitions, having more cross-selling potential. And frankly, the deal, it was very straightforward, so it didn't absorb an inordinate amount of bandwidth. And so, the answer is no, we're out there hunting just as we were before this deal, and I don't think it slows us down at all.
Frederick Allen Wise
Great. And just a last one for me. Just maybe a little more commentary on thinking about the growth that we saw in the quarter, sort of the volume versus price versus the procedure recovery aspect of things, especially to what extent did price help you out in the quarter overall?
George W. LeMaitre
Sure, Rick. Yes, it was pretty straightforward. Price was 13% and unit growth was 9% to make up that $22 million.
Frederick Allen Wise
Thank you so much. Nice to see the strong start.
Operator
(Operator Instructions) Our next question will come from Michael Petusky of Barrington Research.
Michael John Petusky
Strong quarter. Well done. I guess let me start, Dave, is there a risk that the Aziyo business in any way cannibalizes CardioCel or other business that you guys have?
Dave Roberts
The Aziyo patches are primarily cardiac patches. And as you are pointing out, CardioCel is also. But as we negotiated with Aziyo on this, they fully understood that. Obviously, I think the key idea is, when we have a customer and a current customer is using CardioCel or a new current customer is using Aziyo, then we're going to support those customers with the current products. Of course, there are a lot of customers out there who are using neither, and so for us it's just extra optionality for our sales reps to present to those specifically cardiac surgery customers. I don't really see it as a conflict. I see it as additive to the bag. And like I said, we'll be supporting each set of customers going forward.
Michael John Petusky
I guess possibly George, but anybody who wants to weigh in on this, the Valvulotome, it's a mature product category. To get 29% growth on that is just sort of stunning to me. Can you guys describe -- I guess price was a big part of it, but I guess how were you able to raise price on this type of product at this point in its lifecycle? I mean had it just not had an increase in a while? Or was there an innovation? Or can you guys just speak to what what's underneath that 29%?
George W. LeMaitre
Sure. A couple of things. Maybe I'll go at units first. And as you were pointing out, it's mostly price, but still there's some unit action here too. You remember that January of 2022 was an Omicron -- it was sort of the last gasp of Omicron. Q1 '23 versus Q1 '22, you're getting sort of a little bit of a lift. I don't know what it is in this 29%, I can't even guess, maybe it's 5% or something like that. Because January of 2022, excuse me, was so weak and January of 2023 was normal. You get a little bit of that, so there's some of that. But even if you look at Q1 units and you annualize them for Valvulotomes, we are seeing something like, and I don't have the number with me here, but I think it's something like a 5% or 8% annualized unit growth rate on Valvulotomes versus last year. That's not very typical. We don't grow them that much. One possible reason is there was a really important study published in December, although I don't know that this is true, this is just a possibility, called Best CLI. And Best CLI is coming to the surgeons and the radiologists and it's saying, and the cardiologists, and it's saying, this bypass that you do with a Valvulotome is usually more durable than putting stents and using angioplasty balloons in bodies. It's a very big study that was published in the New England Journal of Medicine, a very important study for us. Maybe that's helping out. And then -- so there's a couple of answers there. I know I'm not -- it's not perfect here, Mike. But then finally on the pricing, we bought the Eze-Sit Valvulotome in 2019, and we finally this year, going into this year, we finally said, you know what, it's too complicated for the customers to see one price on the Eze-Sit and on price on the old LeMaitre Valvulotome, so they're all the same now. I would say that was sort of the key pricing move was to just bring the 2 of them to the same level to de-confuse anyone about what the price of a Valvulotome was. It was a hefty price increase for that reason. But I agree with you when you're supposing, wow, it's late in life, what happens. Maybe this is a valuation of LeMaitre's niche business plan. We try to be #1 or #2 in these markets and there's not that many competitors hanging around. And we do feel like we have some pricing power in some of these product lines.
Joseph P. Pellegrino
Mike, I can give you some more detail on numbers from my private reserve that George hasn't seen. In Q1, it was up 29%. 19% was from ASPs from a price hike, and so 10% I guess units. And then of that, if you split it between the Eze-Sit and the hydro, the Eze-Sit was really the bulk of the increase, a 30% plus increase, hydro sort of in the normal range, high single digits kind of answer. It really came from that Eze-Sit piece and 19% of the increase was ASPs for Valvulotomes in particular.
Michael John Petusky
Awesome. And J.J., while I've got you, I didn't catch, I heard the $800,000 in Q2, but I didn't catch the full year Aziyo contribution.
Joseph P. Pellegrino
For the full year, sort of baked into our guidance is about $3.7 million, $3.8 million.
Michael John Petusky
Okay. Last item I guess. Just because you guys have these building cash and included in that is the marketable securities, what's your assumption I guess on interest income for the remainder of the year by quarter or however you want to break it out? And also, I'm just curious, tax rate still roughly 24.5%, 25%? Does that hold up?
Joseph P. Pellegrino
Yes, 24%, 25%, depending on who's exercising options. It will be lower if you have more. In our normal sort of ETR operating if you will, sort of 25.5%. If nothing weird happens here, you're sort of at that level. For interest income these days, Mike, we're kind of at $600,000 or $700,000 a quarter, something like that. Probably closer to $700,000 these days.
Michael John Petusky
If there's no unusual items, you're doing more than $0.5 million on that line going forward a quarter?
Joseph P. Pellegrino
Yes, that's right.
Michael John Petusky
Outstanding. Thanks guys, a really impressive start. Thanks.
Operator
And our last question will come from Scott Henry of ROTH Capital.
Scott Robert Henry
A couple of questions. For starters, I always like to ask, could you give me the mix between biologics and non-biologics?
George W. LeMaitre
49% biologics.
Scott Robert Henry
Okay, great. Thank you. And then just as a follow-up to the conversation you just had on Valvulotomes with regards to price increases. And if we think about price increases in addition to inflation, so excess price increase, how much room do you believe you have for your product lines on pricing? Do you get much pushback? Does it vary? Just how should we think about the sustainability of being able to put through price increases beyond inflation?
George W. LeMaitre
That's a good question. And I think your question would be even more full if you said, depending on when you do this. Because right now, in December and January and February just that we came around the corner of the year, very little pushback on everything we did. And I was just visiting our European subsidiaries last week, and the European reps who are very conscious about price hikes were making remarkable statements to me like, George, no one cared, it didn't matter. They're so nervous about not getting supply from their manufacturers that they're just happy you're talking to them right now. I think the supply chain dynamics and then also the external inflation in Germany of 10% let's call it, those 2 things conspire to when you put a 13% price hike at these hospitals right now, at least for now, they're not blinking. Now I had 2 years ago, 4 years ago, before all this, that was not the case. And we have this chart in our online PowerPoint presentation about the company where we call out these price hikes. And I think we did 13 in this Q1, and you guys help me out, 8 or 9 in the last 2 years before that. And you got a little bit more pushback 2.5 years ago, but nothing right now.
Scott Robert Henry
Okay, great. Thanks for that color, that's helpful. And then just on the model, a couple of numbers. I noticed G&A was a little bit above trend. And then when I look at sales and marketing, I usually calculate expense per rep, which was a bit higher than it's been in the past. Are those trends? Or is that noise? Just how should we think about that?
Joseph P. Pellegrino
Yes. In the quarter, you're asking year-over-year I think, maybe that language. G&A up 9% year-over-year. I'd say a few more hires, a few more employees and then COLA, cost of living and salary increases year-over-year. And then more T&E. We're definitely traveling more I think, generally speaking. I think that's what's driving that 9% growth. And then selling and marketing up 39% year-over-year, and that is a number of things. One is, as George was talking about, more reps, 16 more reps year-over-year. But also, commissions were significantly higher in Q1 than sort of year-over-year or run rate or however you want to look at it. And that obviously goes hand in hand with the higher sales. Quotas for sales reps were made back in October, November, December and Q1 turns out to be a fantastic quarter. Cases are up and so commissions are way up as well. That piece of it, that will stay high. If the sales piece stays high, that hospital backlog or "case surge" stays high and it will come and normalize if it comes down, so we'll see. And then the other piece in Q1 is the sales meetings. We have typically historically done annual sales meetings in January for the Americas, for Europe and for APAC. We were off last year, but we were on this year. And so that's a decent number for the year-over-year comparison.
Scott Robert Henry
Okay, great. And the final question, when I look at the Aziyo transaction, I mean it looks just like the type of deal where you want to try out the product for a couple of years and if everything looks good, you buy this. And obviously, you have the options. I mean, is that a fair way to think about it? If this is as good as you hope it is, that this is something you would want the entire thing, and this is more of a process to understand the product better and to get a little more sharpened pencils on the transaction?
Dave Roberts
Yes, Scott, we've been familiar with this product line for a while. But of course, you never get a perfect due diligence look, and so for us to have it in our own bag and be selling it ourselves in the United States is just a really good way to try before we buy. That's exactly what it is. And if we do exercise the option, I imagine, as we talked about, it was $6.8 million of revenue in the U.S. There's a little bit OUS, but it would be the third biggest acquisition they would have done. Or if it grew, it could be the second. It's not small for us. Of course, we have our sights set on larger transactions going forward. But this is a nice sized transaction, sort of a perfect drop-in for LeMaitre except this time we get to try it out before we buy it.
Scott Robert Henry
Okay, great. Thank you for taking the questions and congratulations on really strong results.
Operator
One moment. I am showing a follow-up question from Michael Petusky of Barrington.
Michael John Petusky
Yes, J.J., rather than texting you later, I was wondering --
Joseph P. Pellegrino
While I'm driving?
Michael John Petusky
I want to keep you safe. Stock-based comp, CapEx and cash flow from ops?
Joseph P. Pellegrino
$1.29 million of stock-based comp, $1,290,000. Depreciation and amortization $2.351 million. And CapEx, $2.13 million.
Michael John Petusky
I'm sorry, did you give cash flow from ops? You cut out there for a second.
Joseph P. Pellegrino
$2.28 million.
Michael John Petusky
All right, thanks. Have a good night, guys. Thank you.
Operator
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.
