LeMaitre Vascular, Inc.

based on our estimates and assumptions as of today, October 29, 2020, 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 non-GAAP outstanding debt. 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 review COVID's impact on our company as well as Q3 sales and profits. In light of the recent escalation of COVID, we must redouble our commitment to the health and safety of our employees. We now know of 12 employees who have contracted the virus. Ten have recovered, and we await word on the most recent cases. In addition to requiring masks and temperature checks, in September we provided distance-sensing watches to all Burlington employees. The watches beep when employees are six feet apart, saving this information for future contact tracing. In Q4, we'll expand this watch program to our three other production facilities and our European headquarters. Perhaps due to these safety measures, we're currently experiencing no manufacturing or logistical issues due to the virus. 95% of our production personnel have remained on campus throughout, and approximately 50% of our administrative personnel have returned. While elective surgeries have recovered for now, the job description of a sales rep has changed in the time of corona. Access to hostels and surgeons' offices has been restricted. Visits often require an advanced appointment or invitation and adherence to other safety measures like temperature checks. Like all of us, sales reps have leveraged available email and video technology, but there are limits to this. And with another COVID wave upon us, we expect rep access to continue to be challenged. As to our financial results, we posted sales of $36.4 million in the quarter, up 25% versus Q3 2019. Geographically, sales were up 37% in the Americas, 12% in Asia Pac, and 6% in Europe. The three recent acquisitions, Artigraph, CardioCell, and EasySight, and the return of elective surgery drove growth in Q3. These record sales, combined with headcount reductions, produced strong bottom line results. We generated $10 million of op income in Q3, EBITDA of 12.6 million, and EPS of 37 cents a share. With that, I'll turn the call over to JJ.

Thanks, George. Gross margin in Q3 was 62.3%, down from 69.3% in Q3 2019. The decrease was driven largely by autographed purchase price accounting, as well as manufacturing inefficiencies. We do expect a rebound to 65.5% in Q4, as autographed accounting normalized it. Operating expenses in Q3 were $12.7 million, down 11% versus Q3 2019. The decrease was driven by reduced selling and marketing expenses, down 31% year over year. Fewer reps, fewer trade shows, and less travel drove the decline. Manufacturing transfer costs also declined as the factory integrations of OmniFlow and Sintel were completed in Q2. Operating expenses also benefited from a $470,000 gain on the sale of our recently closed OmniFlow manufacturing facility in Australia. It seems like Q3 is an operating expense low watermark, and our guidance reflects this. We reversed COVID-related salary reductions on September 1st, and we are cautiously hiring more sales reps. The newly acquired Artograph product line is performing above expectations and generated $5.4 million in Q3 revenue and $950,000 of operating income. Our Q4 guidance includes Artograph sales of $5.6 million and an EPS contribution of 5 cents per share. We ended Q3 2020 with $34.4 million in cash, an increase of $9.3 million versus Q2 2020. increase was driven by $14.1 million of cash from operations, $2 million from the sale of our Australian building, and $1.2 million in stock option exercises. This strong cash generation enabled us to repay $4.5 million of our autographed acquisition debt, and we ended the quarter with a debt balance of $60.5 million. You may recall that we experienced CD mark issues with some of our devices recently, including Dacron grafts and bovine patches. We are pleased to report that in Q3 we received temporary authorizations allowing us to sell the grafts and patches to at least Q4 2020 in 12 European countries. Any impact related to this issue is included in our Q4 guidance. At the midpoint, our Q4 sales guidance represents an increase of 19% versus Q4 2019, and our Q4 operating income guidance represents an increase of 70%. At the midpoint, our Q4 EPS guidance of 30 cents per share represents an increase of 32%. With that, I'll turn it back over to Laurie for any questions.

Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And we have a question from Brooks O'Neill from Lake Street Capital. Your line is open.

Hey, good afternoon, guys. Yeah, Frank talking on for Brooks this evening. Thanks for taking my questions. Just a couple for you here today. I was hoping you could tease out exactly the bottom end and top end of organic growth assumption. I heard your comment of 5.6 million expected from Artograph, but I was just hoping you could help us have perfect clarity into kind of what you're thinking of from an organic growth perspective for Q4.

Sorry, I was on mute there talking to myself. Yeah, so for Q4, I think we think the organic growth is going to be sort of low single-digit negative numbers, maybe 2% or so, something like that. So, you know, an improvement from where we've been. but not quite yet in positive numbers. And I think the full 19% growth is driven by the autograph and cardio cell acquisitions. And FX actually helps a bit year over year. Q4 as well by about 1.7%.

Got it. And then on the second question, for gross margin, you guys have done a remarkable job of integrating your acquisitions and getting back to Your corporate average in the high 60s looks like you're well on your way with your guidance there for Q4. I was just hoping if you could provide us with a little more granular update on where you're at in the process with integrating autographs and getting your corporate margins back to where they have historically been for the fourth quarter, as well as anything anecdotally you can talk to into 2021.

Yeah. So it's a great question. Thanks. So You know, the autographed inventory step-up piece goes away probably halfway through Q4. And so if autographed costs us 4.5% or almost 5% in gross margin headwinds for this quarter, you know, maybe you get half of that back or so in Q4 and then fully back after that. So that will be a nice improvement for where we are in this quarter. And then... Going forward, I think to the extent that we get integrations done and those integrations then start actually coming through the P&L, you'll start to see improvements. And obviously we haven't guided on this, but the OmniFlow integration was recently completed and the Syntel integration was recently completed. And even though those are done operationally, the inventory that we had previously made or purchased at a higher cost, still hasn't all been sold out. So as those sold sell out, you'll get an improvement there as well. So if you never did another acquisition, eventually you'd see us return to the glory days somewhere around there if you look back in time in terms of our gross margins. But I think we've been super active in the last couple of years, maybe five deals in the last couple of years. So there's a lot of integrating to do. Two of them are done. One of them, this autograph piece, is going to fall away pretty quickly. And so I think that's sort of what it's feeling like going forward.

Got it. Perfect. Thanks for asking my questions. And congrats on a solid quarter, especially given the backdrop. Good job. Thanks.

And again, if you would like to ask a question at this time, please press star then the number one on your touchtone telephone. Your next question is from Rick Weiss from Steeple. Your line is open.

Hi, guys. It's Drew Ranieri on for Rick tonight. Thanks for taking the question. First, I just wanted to start on the sales force for a moment. JJ, I think I heard you mention that you're potentially going to be hiring or lifting the freeze of hiring for sales reps heading into the back part of the year. but just kind of your thoughts on how we should be thinking about LeMate adding sales reps. I think you added some from the autographed acquisition and maybe how your guidance contemplates those ads in your operating income.

So, Drew, this is George. Maybe I take that. Maybe it's a little bit more in my corner here. So, yeah, we have started hiring – This is new to us. We have about 12 requisitions up on the board right now. We'll see where we go. Obviously, we're watching closely what's going on in Europe for COVID right now and also in the United States for COVID right now. You just get started hiring, and then something changes. So it is a tough environment to predict where you're going to be in three months. It feels like the last call, July 23rd, was a million miles from now, but maybe – As a band, I'd say we'd be up by five or ten sales reps by the end of the year.

Okay. And could you – sorry, I've missed this too, but did you give rep headcount as of the third quarter?

Yeah, it was 79.

Got it. And could you be a little bit more precise in terms of geography?

Sure, of course. 35 in North America. Okay. 33 in Europe, and 11 in Asia-Pac.

Got it. And then just kind of looking at LeMate over the past four or five years, sales rep productivity has held fairly stable. Kind of as you look into 2021, I mean, how should investors think about LeMate's growth going forward in context of rep productivity now that the sales force is is roughly 20% smaller than where you were at the beginning of the year, and the reps you're hiring now will need some time to be productive or to get to productivity levels.

Right. I think the whole question of rep productivity is the heart and soul of this whole thing for our company right now. How much can they get done right now? It's a big question. I don't think we have answers on it at LeMate Vascular. because everything's changed for the rep. They have a very difficult time getting into hospitals ad hoc and into doctor's offices. So I honestly think that's so far away that I couldn't even put numbers on productivity. I would say we feel somewhat fortunate to have gone through the last six months with sort of employee light because we're nervous the reps aren't able to make as much of an impact as they used to And I'm working on a hypothesis that brand switching in a time where reps can't really get into hospitals has been reduced. It feels like people are going back to their safety zones and just using the products they've always used. And I think you see that in our Q3 revenues.

Got it. And then just to be selfish, one last question. Just on the procedure environment in general, Obviously, there's some spikes in cases throughout the world. Just could you talk about what you're seeing so far maybe in your October trends and how that might correlate to your 4Q guidance range?

I think the last part of your question is instructive. What we saw in the first four weeks of October has produced our guidance. Looking at what happened in the summer quarter and then the first three or four weeks, but I wouldn't go off and talk about them. I think there's enough to talk about here about just the quarter that's closed rather than digging into October.

Got it. Thanks for taking the questions.

Thanks a lot, Drew.

And your next question is from Mike of Mike Petoskey of Barrington Research. Your line is open. Thank you.

Hey, good evening, guys. So, George, I guess I want to ask you sort of a bigger question. You know, a lot of companies are starting to sort of share what they've learned during the past six, seven months of sort of a new normal or trying to adjust to whatever we're calling this, unnormal times. Can you just talk about, you know, what you feel like you've learned during this time in terms of your business and, you know, you know, I mean, for roughly three years, you guys kind of had flat earnings. And now in the most challenging of times, you know, you're going to sort of break out of that and most likely show some really nice bottom line growth. Can you just talk about, you know, what you guys have learned and how that all sort of informed the future? Thanks.

Sure. And it may be a surprise or it might not even be about COVID. I think what we learned is about the autographed acquisition and the use of debt and going large. And so I think that's been some of the biggest stuff that we've gotten, J.J., Dave, and I have sort of digested for the year, is that we need to go a little bit bigger with the acquisitions, and I think we're a little bit more comfortable now using some other forms of capital. I think in the past we've had a very conservative balance sheet. So maybe that's one of my big lessons of the first nine months. If you're asking specifically about COVID, I would say, The world, the company is breaking down into two segments right now. It's the sales reps and the managers and then everything else. And I would say on a positive note, it feels to me like in Burlington here, now, you know, I hope there's not going to be some kind of COVID outbreak here, but it feels to me like the game is back on in terms of making medical devices, assuring their quality, having high levels of production, inventory, things like that. And so like all of us on this call, we're probably finding some workarounds where we can kind of go do that thing, but we can feel safe about doing that thing. And I feel like in the five buildings in Burlington, and I would extend this to the other factories at LeMay Basker, we're getting about, we're doing our stuff, we're wearing these watches, no one's bumping into each other. And so far, knock on wood, we haven't had any spread inside of the buildings that are LeMay Basker. I think there's about eight production buildings around the world that are made basketball, and we haven't had any spread. So I think the big thing I've learned is, you know, in the first month, I was really scared of even going into the building. And I think now we're not. Many of us are coming back to buildings. We figured out how to get around. But then as I answered Drew on the sales force, there is something very different about the sales reps. They need to go out and get into other people's buildings. And I know that in our building in Burlington, our five buildings, there's a sign on the door that says don't come in unless you're one of these 37 people that work here. And that's sort of where the hospitals are going with this. Unless you're very specifically asked into their hospital, they don't want to see you. So I would say for the broad, you know, 75% of our employees, the game's on. We're doing stuff. It's getting back to work around normal, if you will. But with the reps, it's a lot harder and more difficult to, And I think I've answered that question in two different ways. So hopefully you got something out of my lesson.

Absolutely. Just one kind of quick follow-up on that subject. So when you think about just on the sales rep side, I think at one time you guys may have been like 110, 115 reps or 112, some number like that. Can you envision even two years from now being back at that number? Or do you think that sort of, what you've possibly learned on that side of things is maybe you don't need that level of sales force.

Well, remember, we're dealing in so many if-then statements right now. And so if you tell me there's a vaccine coming out in February and someone's going to be sticking my right shoulder with a vaccine, definitely we'll be back there. But if you say it's not going to work and things are going to drift, I would say, well, we'll feel our way towards that. You probably hear from us every three months. I think the bias right now is we're a little bit light at 79, and you're quoting a correct number. High Watermark a year ago was 112. And so I would say the bias inside these buildings is we're a little light, which is why to that 79, we've got 12 requisitions out there, and I would say the band is we're trying to add five to ten right now. Who knows? Some of these guys quit on us. Remember, it's not all like we went off and took them all out. We lost eight or nine reps during the summer. One thing that we found reps do during when they can't leave their house is they start job hunting. So we lost some reps, too. It wasn't all something that we wanted to do.

Okay. Okay, great. And then just a quick one, I guess, for JJ, and I may have missed this at the outset, but did you guys talk about sort of top-line drivers in terms of like the big product categories, all the tomes, Zenasure, Allografts, you know, the performance things?

We may have touched on it. You're thinking year-over-year or you're thinking sequential?

Yeah, year-over-year, if you could.

Yeah. So, I mean, year-over-year, I would say the artograph piece is certainly an important part of the equation. Bovine grafts were up $5.3 million or something like that year-over-year, driven by the acquisition. And then the cardio cell acquisition actually – helped a lot year over year as well, reported, by maybe $1.8 million, something like that. So that's probably your number two driver. And then valvulatomes were up pretty sharply as well year over year, driven by the hydro but also the easy site and price increases related to the easy site. So it's been another nice acquisition story, really. So those three acquisition pieces really helping drive reported sales year over year.

What about valbutones X, EZ, and then Xeno?

I think they were up decently. I can't remember the percent. Maybe one of you guys can. But I feel like it was still a nice answer for the face valvulotone business.

It's single digit, 7%, 8%, something like that. I think it was more, Jay, I think we had a really nice experience. I don't know the exact number, but I think we had a really nice experience, particularly in Europe with the lamate valvulotones.

That'll be the total units worldwide. We're up 9%. And Zeno?

Is that a question in there? Sorry, we couldn't hear.

Yeah, no, I'm sorry. Yeah, I may have missed it, but did you give Zeno Zenosure a year-over-year?

Year-over-year... Yeah, go ahead.

Go ahead, Dave. Mike, it was flat reported year over year. Organic was down 2%. And there was a little bit – the down 2% was a little bit affected by a backorder in Europe related to some of the CE topics.

And just last quick one, any update on Xenosure trial in China? Thanks.

Yeah, update on the trial is a little bit of progress, a little bit of better news on that trial. Because China's cleaned out their COVID problem, the follow-up, which was getting lost, the patients were being lost to follow-up in Q1 and Q2. The patients are now comfortable coming back to the hospital. And as a result, the cardiac trial now needs no more enrollees and is effectively done enrolling. And, you know, to give you a high-level feedback, look at this, I would say the cardiac side, we're thinking about approval in 2023. We don't see roadblocks on the way there. For the vascular side, which is a different side of the trial, we also have been happily surprised with the follow-up that's starting to occur. We do have a roadblock. We have an 85% chance that we'll be able to work our way around the roadblock. There's a question about the endpoints and about the redoing of the endpoints. So we'd say 85% chance yes in 2024 and 15% chance no, we will not be allowed to redo our endpoints with the Chinese FDA.

Great. Thank you. Thanks a lot. Thanks, Mike.

The next question is from Jim Sidoti of Sidoti Incorporated. Your line is open.

Hi. Good afternoon. Can you hear me? Yes, Jim. We can, Jim. All right, so just to be clear, I think you said Artograph added about $5.4 million in revenue, but the total acquisition revenue was closer to $8 million. Does that sound about right?

Yeah, you're in the ballpark. Total acquisition revenue about $7.6. Okay.

And then, you know, if you take the $5.4 you did this quarter and then you did a couple million in the June quarter, you're looking about $5.6, I think you said, for revenue. December, so it sounds like you're thinking that the autograph is going to add, you know, $13 million this year?

A little less than that, a little more than $11 million.

Okay, so it's $5.4 million today, I guess.

Yeah, there's a couple hundred in Q2, the little stub period, and then $5.4 million and then $5.6 million, yeah. But if I look at the –

The operating income it generated this quarter versus the interest expense, it sounds like it was accretive even in this quarter with the extra cost of goods sold.

Yeah. No, it's a good story, Jim. On an off-income basis, it added almost a million bucks. When you got done with taxes and interest expense, it was accretive to a penny a share.

So I guess Dave can put this one in the win column right away.

He's already got it there.

Not quite, but early days still. All right. Can you comment at all about the trends, you know, July, August, September? Did it get better every month in the quarter?

I can give you those numbers. I'm happy to. Organically down 7% in July, flat in August, and up 1% in September.

Okay. All right. And then, you know, the guidance for Q4, you know, I'm impressed you're giving guidance at all with the current situation, but 34 to 38 million, is the difference between the 34 and 38 what happens with COVID or is there other factors in there?

Yeah, there's definitely a COVID topic in there, Jim, and You know, as we were thinking about guidance, we were like, okay, do we just assume sort of status quo? Or do we assume a second wave? Or do we assume things get better? And I would say we probably erred a little more on the conservative side. But we'll see. And, you know, you don't know how that's going to turn out. And then there's a little bit of a CE mark issue in there, too, trying to figure that out. And then there's a seasonality piece in there. Usually... Q4 is better than Q3, but in this odd year, I think we feel like some of Q2 sales got pushed into Q3. So there was sort of a nicer answer in Q3, maybe that seasonality was suggest, and maybe that means a little lighter seasonally speaking from Q3 to Q4 for our guidance. So there was a lot of puts and takes going back and forth, big numbers too, in the guidance. And we also talked about not giving guidance because of all that, but I think at the end of the day we felt like We'll just give you the best shot we've got. We'll try and figure out what we think it is and let you guys know.

Okay. All right. And you better not tell my wife about that six-foot watch thing because she'd buy those in a heartbeat. Okay. Maybe she doesn't even need it.

Probably true. All right. Thank you.

Thanks, Jim.

And your next question is from Scott Henry of Roth Capital. Your line is open.

Thank you, and good afternoon. Just a couple questions. You may have hit on them already, but my apologies. So first, could you give revenue in the quarter for biologic versus non-biologic, just keeping the big categories?

Sure. So, Scott, the biologics in the quarter were 48% of revenue.

Okay, perfect. And Q3 upside relative to your expectations, where was that from relative to your original guidance?

Right. I think the guidance was 32.5, Scott, which is probably what you're getting at, and we wound up coming at 36.4. And so it was a big delta. I think if you think back to July 23rd, again, that's so long ago that we were still coming out of a very scary place for the company, and we didn't know what the summer was going to look like, and we figured we'd give some guidance, but we'd give a big wide-range guidance. One of the concrete things that did better than expected, though, was we've alluded to a couple times in the call already, but we got these what are called derogations in Europe for the CE mark, which is each individual country allowed us to place our stuff on the market even without CE marks. And so we sort of did a save of about 90% of the problem we had anticipated going into the quarter on that stuff. And I don't know. In the end, how much did I wind up getting for us? But it was an awful lot. So things worked out a lot better on that front. The autograph, I think, was, I don't know, like 10% better than plan. It was like $400,000 more than plan. And so there's another $400,000 there. And then, honestly, it was just the COVID, the doctors and the patients got back to it. a lot more than we expected as of July 23rd. We didn't know they were going to be rushing back to the hostels and getting their work done. I think that's the foundation of the, in a good way, the myths on the guidance.

Okay. That's good, caller. Thank you. And then the final question, when we think about organic growth, it was negative in the quarter in 2010. How should we think about it going forward, you know, recognizing that I think there are two variables here, obviously the COVID-19, but also the lower sales and marketing? You know, so if you had the same number of reps, do you think organic would be positive? I'm just trying to think about where we would get to some sort of normalized organic growth rate.

Okay. I got to say, I'm going to take the COVID answer on this one, Scott. And I just feel like we're so in the middle of something we don't know about. Real quickly, I just went and I perused like six or seven earning statements from some of the big guys and some of the guys next to us. And it doesn't feel like anyone's producing any growth right now with some very notable exceptions like Penumbra. So I would say no one knows whether the organic growth is bad because of COVID or whether it's bad because Lomate doesn't have 15 extra sales reps. So I think the answer is too deep and too complex to even get at.

Okay. Well, I appreciate you giving some color around the variables, and thank you for taking the questions. Thanks a lot, Scott.

And ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect. Have a great day. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. THE END Thank you. Thank you. you Thank you. Thank you. Bye.