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spk00: Welcome to the Limit Vascular Q2 2021 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of Limit Vascular. Please go ahead, sir.
spk04: Thank you, Operator. Good afternoon, and thank you for joining us on our Q2 2021 Conference Call. With me on today's call are Chairman and CEO George LeMay 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 29, 2021, 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 the disclosures of 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 and non-GAAP measures is discussed in this call, is contained in the associated press release, and is available in the investor relations section of our website, www.lemate.com. I'll now turn the call over to George Lemaitre.
spk01: Thanks, JJ. On today's call, I'll cover three topics. Number one, COVID's impact on our employees. Number two, record Q2 sales, And finally, number three, rebuilding our Salesforce. First, I'd like to review COVID's impact on our team. 38 employees have been infected since the pandemic began with all now recovered. Thanks to the availability of vaccines, our US and UK staff returned to the office on June 21st and our EU and Canadian staff did the same on July 26th. And we continue to observe health and safety measures in our facilities. We posted record sales of 40.7 million in Q2, up 64% versus the COVID-affected Q2 2020. Sales grew 83% in the Americas, 36% in EMEA, and 30% in APAC. By product, autograph sales were 6.7 million in Q2, and there were several records. Valvetomes, carotid chunks, carotid patches, and allografts. APAC benefited in Q2 from $250,000 of Japanese Xenosure sales, and we expect to submit Xenosure trial results to the Chinese FDA by October. Chinese Xenosure approval is likely in 2023 or 2024. We ended Q2 with 88 sales reps. Despite 27 open requisitions, sales rep hiring has been slow. We intend to return to our pre-COVID high watermark of 112 reps. Meanwhile, we're expanding our warehouses in England, Italy, and Japan in order to improve customer connections and speed up order fulfillment. By October, we'll be shipping from our warehouses to hospitals in eight of our nine largest markets. With that, I'll turn the call over to JJ.
spk04: Thanks, George. Our Q2 2021 gross margin was 65.8%, a decrease of 2.7% over the prior year period. The decrease was driven by changes in product mix, manufacturing inefficiencies related to our 2020 personnel reductions, and inventory write-downs, largely from our Tribex product line. We are currently rehiring manufacturing personnel, which should bring manufacturing efficiencies in the coming quarters. We posted operating income of $11.1 million in Q2 2021, more than one-third of which was contributed by Artograph. Operating income was also up due to restrained headcount growth. We ended Q2 2021 with 417 full-time employees, including 88 sales reps, compared to pre-COVID 2019 levels of 454 and 112, respectively. In Q2 2021, our operating margin was 27%. Cash flow is also improving. EBITDA of $13.3 million was up 108% year over year. We ended Q2 2021 with $23 million of debt and $21.8 million of cash and investments. Since the June 2020 autographed acquisition, we have paid down $42 million of debt from internally generated cash. And last week, we retired the remaining $23 million with proceeds from our recent $54 million stock offering. We continue to maintain our $25 million untapped revolving line of credit. Improved profitability and cash flow have increased our access to debt and equity capital markets. Turning to guidance for the full year 2021, our sales guidance of $154.1 million to $158.1 million represents an increase of 21% at the midpoint versus the full year 2020. and our operating income guidance of $37.7 million to $40.4 million represents an increase of 36 percent. Our full-year 2021 EPS guidance of $1.30 to $1.40 per share represents an increase of 30 percent at the midpoint. With that, I'll turn it back over to the operator for Q and A. Male Speaker 1 Thank you, presenters.
spk00: At this time, for the participants to ask a question, you may press star 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Now we have our first question from Rick Weiss. Your line is open.
spk06: Good afternoon, everybody. We could dig into a couple of topics. Obviously, it's great to see the strong quarterly finish. And you've given us very specific guidance ranges for the third and fourth quarter. Thank you. It makes it easier. Maybe just as coming out of the second quarter, you could help us think about trends and momentum? Obviously, it's not surprising to imagine that the third quarter would be slightly seasonally slower, but have trends basically continued? Have you seen any impact of COVID? Just in general, what are you seeing big picture out there and how do you feel like you're set up for the third quarter?
spk01: Hey, Rick, this is George. Thanks for the great question. So I'm going to limit my comments, if that's okay, to Q2. I really don't want to get into what's going on in Q3 already, but You know, as a comment that gets truncated June 30th, it was a really strong quarter, and we could feel the customers taking the products away from us during the quarter, and we're not trying to take any great credit. I think they've been waiting, and a lot of these procedures got backlogged, and we felt that in Q2. The big guessing game, I think, around our company and medical device companies in general would be, as you look at Q3, how does that continue? If it continues... Or does it sort of play out in Europe a little bit more than it plays out in the U.S.? Maybe it's exhausted in the U.S.? Those are unanswered questions for us. But in Q2, we definitely felt it. And we'll take a cautious wait-and-see approach to Q3 and see what happens. And then it's how much do people take vacations as well in Q3? Do people feel like particularly the Europeans, hey, we're owed a vacation after all of this time, or do they say, no, I want to go back and do my procedures and we'll push the vacations into some other time. I don't know the answers to those questions. But we did our best with our guidance to try to answer those questions inside of our guidance. Gotcha.
spk06: And maybe this is more for JJ. George talked about the The U.K. staff and Canadian staff, you know, back at the facilities. You're talking about hiring, if I understood you, the manufacturing folks. And my sense is you think there could be manufacturing efficiencies. Just how do we think about the potential positive impact of all that, maybe lower costs from getting area back on site, more manufacturing personnel doing something that helps? How do we think about margins, the impact on margins going forward?
spk04: Yeah, thanks for the question. So maybe the first piece of it is in Q1 and Q2, Rick, you got some extra excess and obsolete inventory write-downs from product lines that aren't doing well or that were sort of exiting or just sort of struggling a little bit. And I think those abate for the second half of the year. And so maybe there's a little help there moving forward Seasonally, Q3 is typically a little bit better for gross margins, oddly as well. So maybe you get a little help there in Q3. And then in terms of the direct labor folks, you know, we did lay off a bunch of folks for and during COVID along with the other layoffs that we made. Those inefficiencies are coming through now. And I feel like as you get into Q4, you start to run away from those. And we've been working to hire more direct labor folks over the last month, and maybe you get a benefit from those sort of as you move forward. So, you know, it's a combination of all those things. And I think the other piece of it may be, Rick, is ArteGraft been doing really well? And ArteGraft has a nice, strong gross margin. And so to the extent that we continue to see strong quarterly numbers from ArteGraft, that will help the margin as well.
spk06: Got you. And maybe just last for me, it's, you know, given the much strengthened balance sheet, the greater financial flexibility, your strong cash flow, it's always hard. I mean, somebody has to ask it. I'll take the fall. Maybe Mr. Roberts could discuss the M&A pipeline and just does this set the stage for even more activities just Any update, any color there, Dave?
spk03: Yeah. Hi, Rick. Thanks for the good question. Yeah, I mean, obviously we were very pleased with that equity offering. It was nice to pay off the debt, save a little bit of interest, have a clean balance sheet optically for potential sellers, and just frankly to have more dry powder available. In terms of the pipeline itself, I would say, you know, during COVID, it did restrict travel a little bit. A lot of the Congresses had shut down. We're seeing them starting to open a little bit, and travel is picking up a little bit. So we are pursuing various targets. I think maybe an object lesson from the autographed acquisition a little over a year ago was, you know, for us to be considering larger targets. Artagraft is going very well, obviously, as you can tell, and also to borrow money. We've got a lot of EBITDA. We could leverage that. So we are looking at larger targets these days. I would say our focus hasn't really shifted. We're still focused really on disposables and implantables used by vascular surgeons. maybe branching out a little bit into endovascular or cardiac surgery. But we like the niche markets, and we can look a little bit larger. So we just wanted to be prepared for that. And, you know, we'll see when a willing seller that meets all of the strategic criteria shows up. We will be ready for if and when that time comes.
spk06: Thanks very much.
spk00: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. We have our next question from Matthew Mission. Your line is open.
spk02: Great, and thank you for taking the questions. Just on the second half outlook here, I understand not wanting to give too much color around phasing in 3Q and 4Q and some of the caution here. I guess why would 4Q not be better than 2Q given where we're at today?
spk01: Go ahead. And you're talking about sales or you're talking about up income? Yes, sales. Okay, sorry. And you're looking at sequentially from Q3 to Q4 or from Q2 to Q3?
spk02: Yeah, Q2 to Q3. Q2, I can understand like Q3, we're still in a little bit of a gray area. No one really kind of, people aren't sure what people are doing this summer. But again, Q4 seems like it should be a little bit stronger than what you have implied or what you have put out there for your guidance.
spk03: Matt, it's Dave. Good to hear your voice. Thanks for the question. I'll start it and then George or JJ may add in, but Q2 was a unique quarter for us, particularly in the United States. You know, what we saw, what we all felt here in the U.S. was the COVID pandemic maybe lessening a little bit. We believe we did feel a backlog of cases come through, which is why we saw such widespread growth among our product lines, so many different products setting records. I think it was unprecedented. But, you know, now with COVID, with the delta variant and we're hearing about elective surgeries at some hospitals in the southeast shutting down and it's just q3 and then of course we know that covet likes the cold weather It's really, you know, we have to be a little bit cautious as we think about how to sequence, you know, in Q3 and in Q4. So that certainly was a consideration, but I'll open it up to either George or JJ if they want to.
spk01: The quick FX topic as well. So we're a pretty European business, and we'll lose about $200,000 of sales going from Q3 to Q2. There's the CE marking thing, Matt. There's a little nuance here, so... While we were thrilled and we wrote a press release on May 25th to get those five CE marks, we have continued to put the message out there that two of the products that they approved, and the more important one being Xenasure, they approved a device that we weren't making before the actual approval. They approved a device that had four years and a slightly different IFU, et cetera, et we had to start making the product all from new. And so we were selling, oddly and ironically, we were selling under derogation before May 25th. And then as of May 25th, you couldn't do that anymore in most markets. And so post-May 25th, for Xenosure, in Europe, you should expect some struggles. So maybe that links up a little bit. And then I would say we're trying to figure out, my final point would be, So FX, the CE marks, not really in Q3 being a great thing, but coming back in Q4. We should be fine in Q4 for all the CE issues. And so I'd say those are two big issues. And then, you know, we're a pretty European business, and normally, again, we don't know what's going to happen. Normally those folks take vacations in the summer, and we usually see a downdraft of, I don't know, something like 3% or 4% from Q2 to Q3. So our normal seasonality... would have projected these numbers as well.
spk04: Yeah, and I might add one more to this, which is you're trying to figure out the COVID pace of recovery in Europe in Q4, and it's kind of probably not something you want to get out on a limb on. So maybe if we think there's going to be a bit of an opening there, more folks going into hospitals, getting treatments, but not a crazy opening like we feel like we felt in Q2 in the U.S. Maybe that's a more sort of prudent approach. And at the end of the day, it's still a 7% growth rate and tough sort of comps, if you will, as we got away from COVID last year. So I still feel like it's a pretty nice number.
spk02: Okay. Thank you for all the color on that. And then just one last question, just the pace. of hiring for the sales force to get back up to where you were before. How long do you think that could take you?
spk01: Right. Matt, that's a great question. This is George again. Yeah, it's been a little bit frustrating. We've only picked up a net two sales reps in three months. I think the pace will start accelerating. At the last time we spoke, I had 15 open requisitions, I believe, at the last call. and I have 27 sitting out there right now. I've gone a little bit wider geographically. I would say it's two-thirds or should be two-thirds an American issue because of this new autographed acquisition. We've gotten a little bit more, okay, well, we can fill in in Japan. We've got that Japanese Zenosure approval and some stuff in Europe with the comeback of Zenosure in Q4 for Zenosure Europe. So I don't know when. It does feel like it will start getting a little faster. In the meantime, also, sort of in terms of teeing up the hiring machine, we've got a net ad of about two new regional sales managers, one in Europe and one in the U.S., and I think that's on a number of like 15 or 16. So you've got more hirers, and I think with 27 spots open, you'll see it pick up. But it's tough to guide when people will take jobs, and I'm sure on all the phone calls you've been on so far, I'm going to guess folks are complaining a little bit about, hey, it's hard to hire people. And I think we're running into that as well.
spk02: Yeah, every single one. All right. Thank you, guys.
spk01: Thank you very much.
spk00: Once again, if you would like to ask a question, please press star 1 on your telephone keypad. We have our next question from Mike Tuskey.
spk05: Good evening, guys. A couple questions. JJ, I'm assuming sort of a pro forma balance sheet is something, I mean, is it essentially zero debt and 50 million cash, roughly? I mean, is that basically the math?
spk04: I think that's, you know, that's directional. The raise was 54 and a half, and then there's you know, 6% or so for the banks. We keep the rest, take out 23 of debt, and then you can take the rest of that and put it under the cash balance.
spk05: All right. So, Dave, I guess I want to ask, in terms of just some of the targets you're looking at, I know some of these conversations go on for, you know, several quarters or multiple years or whatever, but, you know, when you look at sort of the Whatever the number of targets are or conversations that are going on, are there sort of autographed size deals that you would say you were in meaningful conversations with at this point?
spk03: Yeah, I mean, these discussions can turn on a dime. I would say I've got a handful of opportunities, the range up to $25 million in revenue at the moment. Artograph, you'll remember, its trade sales were $15.6 million in the LTM period. Prior to the acquisition, its hospital sales, Mike, were $18.6 million. So, you know, there are opportunities that are larger than autographed, and there are opportunities that are smaller at the moment. Sure. Okay. All right.
spk05: Great. And, George, if this variant issue heats up, Are there things that you all learned just in terms of, you know, getting employees back to work and whatever, social distancing, PPE, et cetera? I mean, if this variant does sort of become a thing, are there things that you sort of learned in 2020 that, you know, you think will make it easier to keep your folks healthier? I know nothing's foolproof, but I guess that's the question. Thanks.
spk01: Sure. Okay, so the things that we learned. You know, I think there may also, maybe more so than us, I think it might be the employees themselves, and I can't speak for all 400 of them, but I think they've all come to terms with COVID in their own way, and they're watching us. We have all these distancing watches, and we check temperatures on the way in. We're all spread out in all our facilities, and I think they've learned that oh, there are no COVID spreads within LaMate Vascular's building. I think there was one documented spread. And so I think maybe it's more what they've learned about what the risks they're willing to take on weekends at dinners and things like that. But we've called them back to work. We really didn't get much blowback on that. We were happily surprised. There's a couple people that needed some, you know, some variances from what we were selling to everyone. But it's been nice. We haven't heard anything about it. So I think for now we're good to go, and I think people are learning how to handle this thing better. But I think it's more about the employees and their approach to us rather than what we're learning. We're now still doing the same thing we've been doing for 12 or 14 months with all these distancing watches and six feet and everything like that.
spk05: Okay, great. I'm curious, has Artograph now passed Valviatomes as a product category, just in terms of, you know, top-line revenue?
spk01: You know, 6.7 is that. I would say that the whole category of Valviatomes, no, it hasn't passed that, but it's gotten past some of the brands, some of the individual brands. So we have two or three brands inside of there. But the whole category, no, the Valviatomes is still the largest category at the company.
spk05: Is that north of $30 million? I don't suspect it's north of $40 million.
spk01: Hang on a second. I'm happy to tell you what the Q2 number was. Sorry, let me just get it. JJ or Dave, do you have that handy? I have the organic number, I think.
spk04: Q2 valvulatum 7.7.
spk01: And the autograph, just for everyone following along, is 6.7 in the quarter. That includes allocated shipping for both product lines.
spk05: All right, very good. Thanks. Congratulations on the continued, I can't believe, you know, if you had told me we'd be here a year ago, I wouldn't have believed it. Congratulations. Thanks.
spk01: Thanks, Mike.
spk00: There are no more questions at this time, presenters.
spk01: Okay, thank you. Thank you very much, operator.
spk00: I guess it's time to hang up. Okay, 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.
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