LeMaitre Vascular, Inc.

to the Lemaitre Vascular Q4 2022 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of Lemaitre Vascular. Go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us on our Q4 2022 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, February 23rd, 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 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, and gross margin, excluding the impact of foreign exchange. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the investor relations section of our website, www.lemate.com. I'll now turn the call over to George Lemaitre.

Thanks, JJ. On today's call, I'll cover three topics. Number one, organic sales growth was 8% in Q4. Number two, our Salesforce build-out and APAC expansion continued. And number three, we have largely finished our initial MDRCE filings. We posted sales of $41 million in Q4, an 8% organic increase. Organic growth was led by APAC, up 22%, followed by EMEA, up 9%, And the Americas, up 6%. By product, biologic patches were up 11%, carotid chunks were up 24%, and bovine grafts were up 11%. These increases were partially offset by OmniFlow, which was down 55% due to a backorder. We project this backorder will largely be resolved by the end of Q2 2023. Rep headcount stood at 131 on December 31, 2022, up 27% year over year. Rep headcount grew 25% in both the Americas and EMEA, and 40% in APAC. We also added two regional sales managers in 2022. Territory sizes are now smaller, and we think this will lead to better coverage of our Vasco surgeon customers. Notably, we held sales kickoff meetings for all three geographies in January 2023, our first in-person meetings since January 2020. Looking ahead, we expect to end 2023 with 135 to 140 reps, and sales guidance for Q1 suggests a record $43.8 million quarter or 13% organic growth. We're also opening new direct countries. In Q4, we sold our first products from our new Seoul office. Our Korean business should be approximately $1.25 million in 2023 sales versus about $400,000 of net sales to our longtime Korean distributor in 2022. Korea is our 25th direct market, and we now have 12 offices worldwide. Also in November 2022, we signed a term sheet to buy out our Thai distributor, and we plan to open up a Bangkok office by Q3 2023. Korea and Thailand were previously our two largest international distributors. Turning to Europe, we were happy to see Brussels pass legislation to defer the MDR deadline until 2027. We're still pressing ahead with the filing of our MDRCE marks. We've now filed 12 of our 14 MDRCE applications, and we will file the final two before the end of 2024. Indeed, in January, we received our first MDRCE mark for the Pruitt F3 Carotid Chunt. Q4 2022 was a record sales quarter for our EMEA team, a nice recovery from the somewhat difficult days of the 2020 Before turning the call over to JJ, I'd like to highlight several 2022 achievements. Number one, we grew sales 9% organically. Number two, we became a member of the Dividend Achievers Index. Number three, we built out Team LeMaitre with several headcount records, sales reps of 131, manufacturing personnel of 219, and total employees of 591. We continue to invest in regulatory approvals, including MDRCE applications, RFA allografts in the UK and Germany, and Xenosure patches in China and Japan. Number five, we continue to build out our APAC direct operations. And number six, we undertook a major factory and warehouse expansion in Burlington. I look forward to these 2022 initiatives paying off with improved top and bottom line results in 2023 and beyond. With that, Turn the call over to JJ.

Thanks, George. Q4 2022 sales were $41 million, an increase of 4% on a reported basis and 8% organically versus Q4 2021. FX headwinds continued to be substantial, and we lost $1.7 million in sales due to the strengthening dollar in Q4. For the full year 2022, sales were $161.7 million, an increase of 5% on a reported basis and 9% organically. We lost $6.1 million in 2022 sales due to the strong dollar. In Q4 2022, we posted a gross margin of 63.6%, a decrease of 210 basis points versus the prior year quarter. The strengthening dollar decreased our gross margin by 150 basis points versus Q4 2021. And if we exclude this foreign exchange impact, our Q4 2022 gross margin would have been 65.1%. We increased our direct labor manufacturing team by 54% in 2022, and we increased our Burlington manufacturing footprint substantially. This increase in production will help us mitigate any potential issues related to the MDR transition, product line changes, supply chain disruptions, and lingering labor force scarcity. And while we are excited about the increased unit production, training our new and larger staff has been a challenge. and their inefficiency has hurt our gross margin. We expect to correct this in the coming quarters, and this should favorably impact our gross margin as reflected in our guidance. Q4 2022 operating income was $7 million, reflecting an operating margin of 17%. Operating expenses increased 8% in Q4 versus the prior year, as we continue to hire and invest in many areas, particularly our sales team. We finished 2022 with 131 sales reps. Despite this investment, we expect to slow the growth of operating expenses to 11 percent in 2023 from 15 percent in 2022. And as a result, we expect operating income growth of 19 percent for the full year 2023 and an operating margin of 18 percent. Headcount at the end of 2021 was 450. At the end of 2022 was 591. And we now expect to end 2023 at approximately 625. The cash on our balance sheet continues to grow. We ended Q4 2022 with $82.7 million, an increase of $3 million in the quarter and $12.7 million in the year. The Q4 increase was largely driven by cash from operations of $4.1 million and partially offset by dividends of $2.7 million. Turning to guidance, we expect Q1 2023 sales of $42.6 million to $45 million. which represents a reported increase of 11 percent at the midpoint and 13 percent organically. We also expect operating income of $6 million to $7.5 million, which represents a decrease of 15 percent at the midpoint. Our Q1 2023 EPS guidance of 22 cents to 27 cents per share implies a midpoint of 25 cents per share. For the full year 2023, we expect sales of $174.3 million to $178.3 million, which represents an increase at the midpoint of 9% on both a reported and organic basis. We also expect operating income of $30.6 million to $33.3 million, which represents an increase of 19% at the midpoint and 7% excluding special items. Our 2023 EPS guidance of $1.11 to $1.20 per share implies a midpoint of $1.16 per share, an increase of 24% and 8% excluding special items. With that, I'll turn it back over to the operator for questions.

Thank you. At this time, we will conduct the question and answer session. Please stand by while we compile the Q&A roster.

Our first question comes from Michael Sarcone of Jefferies. Your line is now open. Our first question comes from Michael Sarcone of Jefferies. Your line is now open. Sounds like maybe we move on from Michael unless he's there.

I don't think he is. I will move on. Please wait a moment while I compile our Q&A roster.

Thank you.

Our next question comes from Matthew Michon of Key. The line is now open.

Hey, good afternoon. Can you hear me? Yes, Matthew.

Okay, excellent. Yeah, the quarter was so good, I guess people are speechless. Okay, so… So let's just start with the first quarter guidance. And actually, no, let's start with the full year guidance because I think that's more important. Where is the growth, the 9% growth coming from? How would you break it down between volume and price? And then what's specifically driving like the 9? That's just a really good number.

I'll give you a rough estimate on that. This is George. Thanks for the great question. I would say We think the price hike we installed was around five to 6% on January 1st in our various geographies. We'll see how much we get or not, but I would say roughly speaking, five and a half, 6% price and the remainder on volume.

Okay. And then as I think about the different regions, like where are you dry? Where do you, where do you expect to drive the most growth or how do you, how would you kind of stay in between the Americas, Europe and like APAC?

Right. So, of course, on our guidance, we never really break up the future sales by geographies. It's just too hard. But I would say, in general, what we've seen for the last five years here is that APAC outgrows EMEA, which outgrows the Americas, sort of reflecting how new the territory is in Asia-Pac. It's a little bit less new in Europe for us, and then it's, you know, we've been here for four years in the U.S.,

Okay. And then the last question, just as I think about gross margin through the course of like 23, do you expect to exit like 23 with a higher gross margin than, I mean, obviously it's implied in your guidance with 64.8 versus 65.4, but where do you think you exit the fourth quarter of 23? Do you think you exit at a pretty good trajectory that starts to get you back towards that, you know, high 60s area?

Yeah, I mean, if you start fiddling around with that, the interval of the math that you just mentioned, you know, you're going to wind up doing something like that, I think. But obviously, we're not giving you guidance between quarters. But it's tough to make that math work without sort of doing that. One of the big topics for us, Matt, has been the inefficiency of our DLs as we've ramped up the size of that manufacturing group. And it's along two fronts. One is utilization. Are they working? the proportionate amount of time that we want them to versus unutilized time where they're not directly working on something. And the other is productivity. When they are actually working, are they productive? And so the reason I'm telling you this is because it's an operational challenge to catch up to that, which we will, but it'll take a little time to do that. So you can sort of reflect that in your numbers as you walk through the quarters of the year, how we might recover from that operationally.

All right. Thank you very much.

Thanks a lot.

One moment as I prepare the roster for the next question. Our next question comes from Rick Wise of Stifle. Your microphone is now open.

Hey, good afternoon. This is John. I'm for Rick today. Just to start off looking at the full year guidance for 23. A bit of a range there. I'm just wondering if you could add a little color on what gets you to the higher end, what pushes you to the lower end. What are the kind of key headwinds, tailwinds, crosscurrents you're seeing as you look ahead into 2023?

Hi. Okay. I'll try to help with this one. This is George. Things that could make it go better, you know, if the price hikes all stuck, you never know when you put a price hike in how much it sticks. Maybe how much the turnover would be with the sales force. We've got a lot of new reps here. See what that looks like. It's been fantastic for the last eight months, a very low turnover. But I guess that would push things higher if we had lower turnover and vice versa if we didn't. Those are a couple of the things. How quickly the Korean subsidiary takes off. It's only a $1 million business, but that's of interest to us as well. How long it takes to get the carotid indication in Japan. is actually kind of key. If we got it in Q1, you'll see Japan accelerate in growth, and if it takes till Q4, it'll be a little bit worse. But I've never really been asked that question that way, but it's a good question. It's a creative question, and there's so many moving parts. That is why we try to give a range, although how wide is the range? $4 million is the range. And you do have a taste of how close we are. I think this quarter, we were like within $100,000 of the actual number. So at least for this quarter, our sort of range-finding machine worked.

John, I'd give you maybe another lens to look through it. The four or five big product lines driving growth next year are artographed, valvulatomes, patches, shunts, and restore flow. And they each have their own story. So to the extent that you can be on the right side of all those stories, you'll be on the higher end of the range. And to the extent that you won't, you'll be on the lower end of the range. Arter graft is a story of gaining sort of some unit traction these days post-acquisition. And to the extent that we get some of that, I think that will be helpful. Valvolatomes is the pricing topic largely that George talked about, but maybe some units as well, but mostly pricing, et cetera, et cetera. So there are different product-by-product stories that will drive us higher or lower. But those are the five to focus on, I think.

Great. That's really helpful, Culler. I appreciate it. And just as one more follow-up question, you talked about adding reps in 22, and you're basically at the level you want to be at now. Last year, just to put it from a financial term, sales and marketing grew like 19-ish percent. Top line is like 8% to 9% organic. On that line for 23, should we be expecting more leverage? Is there a way we should be thinking about it as these reps ramp up and And what's kind of a longer-term expectation for you guys for SM growth as you reach a more steady state from a rep perspective? Thanks for taking my question.

Yeah, maybe I answer it a little bit more generally and just talk about op expense in general because the heart of the op expense growth is the Salesforce growth. We feel like last year, I don't know, employees were up at 31%. Reps are up 27%. DL is up 54%. We really went, not crazy, but we went to the mat to fix all kinds of issues around here. But I think we're all committed inside the building of, hey, that was a special year, and you can't let off expenses grow as much as we did last year. So we're putting some kind of a clamp on ourselves of 625 as the max employees at the company this year. And I think that will help start to drive operating leverage. We used to have operating leverage and over the last two or three years we sort of lost that leverage. And I think we're trying to find it back by limiting our growth of headcount. And hopefully at some point the op expenses grow less than the gross profit grows and we get some leverage.

I think I said in my script that op expense grew about 15 or 16 percent last year. We're looking at closer to 10 or 11 percent this year. And you can do the same thing we just did with gross margin, look at the Q1 OpEx sort of guidance that you can impute with the year, full year, and then sort of assume a cadence throughout the year to get there.

Thanks. Thank you. Thank you. One moment while I prepare the queue for the next question. Our next question comes from Michael Patisky of Barrington Research. Your line is now open. Mike, how are you doing? It's George in Burlington.

I'm sorry, am I on?

You are. Yeah.

Sorry, I did not hear who was supposed to be on. Sorry, I apologize. I'm great. Okay. Fifth call of the day. So if I'm asking something that's been already asked and answered, forgive. Update on M&A Pipeline. Any commentary there? Anything to say?

Yeah. Hey, Mike. It's Dave. I would say no real update. You know, we continue to be focused on devices, product lines, companies in the open vascular surgery field with disposables and implantables, over $5 or $10 million of revenue. There are probably two to three dozen legit targets, and we're in touch with them. We like, you know, niche, low rivalry markets. So we're out hunting. We've sort of expanded the target area a little bit. We're looking a little bit in cardiac surgery, a little bit in endovascular as well, but I don't think I have anything really material to report. Obviously, the cash balance is growing, so we can do larger deals, and we are looking, I would say, on the margin at larger targets these days. So, we're out hunting, but I don't have anything to report. We didn't just sign a deal that I'm reporting on today.

So can I just ask, obviously, it's been a while since sort of the needle-moving autograph. Have you gone down a track with any, like, meaningful, you know, what I would consider more meaningful assets where just ultimately either something in the product?

Yeah, if I understand the question correctly, yeah, I mean, we have been, we have evaluated, we have made bids. on assets of a reasonable size. I can think of, you know, a couple in particular that neither one of them transacted, so they're still out there and they didn't happen for various reasons. So, you know, we are, you know, we are looking, but we just, you know, haven't found anything with a, what I'd say, a perfectly willing seller at a reasonable price. And so, you know, our feeling is let's just wait for our pitch and find something that's right, and we'll pull the trigger when that happens.

That's what Warren Buffett says. All right. On Artograph, would you guys be willing to share what type of level price increase you put through on Artograph this year?

Yeah, we would be. You know what? I'm sitting here going, I think it was less than it was the year before. I don't have the exact number right now. I really should. I think it was like 6% or 7%, and I think the year before it was 12%.

I think it was 11% last year.

11% last year. I know you didn't ask that, but I think it was considerably reduced this year to something like 5% or 6%. I apologize for not having that number at my fingertips. I should. Directionally correct, though, I think.

Okay. All right. And, JJ, I was just real curious on tax rate and then R&D related to MDR. It sounds like you guys have made some great progress in getting the filings Does that mean that R&D sort of flattens, or is there a lot of expenses between now and, you know, the next year or so?

You know, we talk about it potentially flattening, Mike, but I'd say it'd be up modestly, you know, that kind of thing. Not as, you know, we're not sort of the wide-eyed guys on that like we were a couple years ago when we were going to have to spend more under control, and it's a little more reserved in terms of the increase, but still increasing a little bit. I'd characterize it that way. And then on the, yeah, the tax rate was high this quarter because our spend on product development was down a little bit this year. And so we got less of an R&D credit on that. And then there were some officers' compensation that we were not able to deduct at the end of the year for tax purposes. So the Q4 rate was a little higher. Going forward, you can sort of think of us as the 25, 25.5% guys.

All right, great. Thanks so much, guys. Appreciate it.

Thanks, Mike.

Thank you. One moment as I prepare the next question.

Our next question comes from Brooks O'Neill from Lake Street Capital.

Your mic is now open.

Thank you. Good afternoon, guys. It's rare that my finger's slower than Petoskey's, but I guess I got on a little bit late today because I too was on another call. Just want to say, I think last quarter was the event of George's new child coming to the world. So I hope things are going well with your family, George, and I'm glad to hear you back on the call this time. So my question quickly is just sort of macroeconomic factors. I think, I think last quarter, the dollars strength was a, had a big impact on results, and you might have said this earlier in the call before I got on, but can you just give us a sense for how currency and some of the various macro factors are affecting the business, particularly outside the United States? Thanks a lot.

You know, Brooks, maybe JJ can handle the currency stuff after I get through this little thing, but You know, there's a couple articles I've been reading about staffing in American hospitals, and I know you asked for international, but I think, you know, our business is kind of 67% North America now. I think we are starting to look at, wow, the hospitals are being correctly staffed and fully staffed, and it's been a long time since we made an excuse about why sales weren't up because of COVID and COVID staffing. But I do feel like in the last two or three months or four months, The staffing levels have been better, and we're reporting cases are going off like they always used to go off, and it's not being slowed down because they couldn't get a bunch of contract OR staffers in to help push the beds around. We're quite excited about that, and I think we can feel that when you talk about macroeconomics from us. As for the currency, maybe JJ has got some insight on that. I'll try. Thank you.

I'll try and make it sequential here, I guess, in a way, because it is turning on us in terms of the dollar weakening. But in Q4, the FX hurt us year over year for about 1.7 million reduction in sales. And then for the full year last year, it was like 6.2 million, something like that. And then in Q1 of this year, 23, Maybe it's a 1.1 million or so bad guy year over year. But then, Brooks, it starts to change. As last year's rate came down and this year's rate is starting to go up, those two are starting to cross. And so when you get into Q3, it starts to be a help year over year. And by the end of the year, you're kind of neutral in 2023. So you can sort of not think about FX for the full year 2023. Great.

Great, guys. Thanks a lot. Thanks a lot, Brooks.

Thank you. One moment as I prepare the next question. Our next question comes from Jim Sidoti of Sidoti. Your line is now open. Hi, good afternoon, guys. Thanks for taking the question.

You know, I'm looking back over the last five or six years and You've never grown Q1 $2 million off of Q4 the prior year before. Is that related to the backlog for OmniFlow?

No, it's not precisely related to that. That's not that large of a factor. It's some of it in there, but no, we just feel like it's a very good quarter. And you're right to pick up the sequential cadence. It's pretty rare that that happens. I'm glad you're following us that closely that you're watching that.

Okay, what exactly happened with OmniFlow and how material is that?

Sure. So OmniFlow is approximately a $5.5 million product when it's running correctly. In the transition from Melbourne, we used to make it there and now we make it in Burlington. In that transition, we messed up the transfer and some of the qualifications didn't work out. We kind of got it started in Q3 and we hit a little bit of a speed bump with some of the sterilization validations. Those have now been sorted out as of January, and we are shipping to our, it's mostly European product, Jim. So we're shipping to our European headquarters right now, and we are actually selling devices now. So we've broken through the, it was basically a shutout for November and December, and we have indeed broken through that now, and we're selling. But so, you know, $5.5 million product line in a great quarter, what does that mean? It's selling 1.75 or something a quarter. And I think in Q4, if I remember correctly from the charts, I was saying we sold about $700,000, $600,000 worth of it. So we still have to catch up to that and then go a little further. So that's why it isn't such a big difference between Q4 2022 and Q1 2023, because we did sell stuff in October. And now we're going to sort of February and March, we're going to be selling stuff against that October sales. So not exactly because of that. It's a good quarter. We don't exactly understand why it's such a good quarter. Maybe some of the hospital staffing comments I was making to the last question from Brooks are sort of an indication of one of our hypotheses. We also have a pretty robust price hike on one of our valvotone product lines called EasySite, which had always been sort of priced as a junior valvotone option, and now it's priced exactly at parity with the regular valvotone. So we've got a little price hike thing there, which may be a nice difference between Q4 and Q1. as well. Okay.

All right.

And then I hope that actually my next question.

Yep. No, that's good. And my next question was related to value. You told me the last quarter you said you had a bit of an air pocket there. Did that come back to normal levels in the fourth quarter?

Yeah. So yeah, that's right. Great memory there. Yes. I think we called it an air pocket on the call that I wasn't on. And then it was up 20% into Q4 sequentially. And better news here is that it feels nice in the start of Q1. So, yes, all repaired. Everything's fine. It's better than fine. Sorry.

Okay.

Last two for me. The guidance implies a pickup in other income, it seems to me. Is that just the growing cash balance and the better interest rates?

Pickup in other income. Let's see.

You know, if you put that

You put in your revenue. Yeah, I can tell you, Jim, down below op income, there's two larger drivers. One is interest income, which has been improving for us. And so maybe there's a little bit of a pickup there. And then in the other, there's FX related to intercompany transactions and other items. And so given the swings in FX, that's had an impact there as well.

Okay, and then the last one for me is on the PP&E, property and equipment. You know, that started off the year at around $17 million. It dipped down to around $15 million in the third quarter. It's back up to $18 million now. Is that the new equipment in the expanded capacity in Burlington, or what's driving that?

Yeah, I mean, we've been, so in the last quarter, Q4, we spent $1.2 million on CapEx. We have been spending on the expanded clean room that we talked about, which is significant, but yeah, that's probably a big piece of it, too, and I'm trying to think of other larger CapEx.

It's in the neighborhood of $3 or $4 million, though. Were you saying numbers like $18 million, Jim? I'd hate to have people walk away thinking that, because that's not what's going on. Yeah, Ed would be

No, you ended the year with $18 million total on property and equipment. Yeah, okay. You didn't spend $18 million.

I mean, I can get back to you with the pieces of that, Jim, but I'm going to guess clean room build-out is a big piece of that answer.

So it feels like you have the people and the capacity in place now so that if demand does continue to grow, you can handle it without any major investments.

Yeah, I mean, I think we feel like we're happy already. Unit growth is positive, and so we're glad we have it. You know, we're no backorder company, and so we've had spikes and sort of peaks and valleys in different unit growth areas, and we've been able to cover those because of the expanded clean room and the expanded size of the manufacturing folks. Anything around regulatory issues, it gets a little hairy sometimes. Those can be covered up with a little bit more inventory made by, you know, more folks. So I think strategically, not financially necessarily purely, but strategically, it's been a really nice answer for us, that expansion.

So, you know, if you look back four or five years, you guys were north of 20% on the operating margin. And I know you're not going to get there this year, but do you think at some point in the next two or three years, if The revenue grows now that you have this infrastructure in place, you can get close to that 20% again.

So, Jim, if you look at the Q1 margin, 15%, and then you look at the full year, 18%, you know, you obviously got to improve from that 15% and then some to get to the full year answer. So, I think implied in our guidance is some nice improvement on the op margin. You know, we're not giving you the interim quarters, but you can play with it and try and figure out where you would get to. So I would say, yeah, we definitely would expect to get back to 20%. That's certainly where we want to be and beyond that. Okay.

All right. Thank you.

Thanks, Jim. Thanks, Jim.

Thank you. Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation.

You may now disconnect and have a great day.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. you Thank you. Thank you. you

Welcome to the Lomate Vascular Q4 2022 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of Lomate Vascular. Go ahead, sir.

Thank you, Operator. Good afternoon, and thank you for joining us on our Q4 2022 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, February 23, 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 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, and gross margin excluding the impact of foreign exchange. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the investor relations section of our website, www.lemate.com. I'll now turn the call over to George Lemaitre.

Thanks, JJ. On today's call, I'll cover three topics. Number one, organic sales growth was 8% in Q4. Number two, our Salesforce build-out and APAC expansion continued. And number three, we have largely finished our initial MDRCE filings. We posted sales of $41 million in Q4, an 8% organic increase. Organic growth was led by APAC, up 22%, followed by EMEA, up 9%, and the Americas up 6%. By product, biologic patches were up 11%, carotid chunks were up 24%, and bovine grafts were up 11%. These increases were partially offset by OmniFlow, which was down 55% due to a backorder. We project this backorder will largely be resolved by the end of Q2 2023. Rep headcount stood at 131 on December 31, 2022, up 27% year over year. Rep headcount grew 25% in both the Americas and EMEA, and 40% in APAC. We also added two regional sales managers in 2022. Territory sizes are now smaller, and we think this will lead to better coverage of our Vasco surgeon customers. Notably, we held sales kickoff meetings for all three geographies in January 2023, our first in-person meetings since January 2020. Looking ahead, we expect to end 2023 with 135 to 140 reps, and sales guidance for Q1 suggests a record $43.8 million quarter or 13% organic growth. We're also opening new direct countries. In Q4, we sold our first products from our new Seoul office. Our Korean business should be approximately $1.25 million in 2023 sales versus about $400,000 of net sales to our longtime Korean distributor in 2022. Korea is our 25th direct market, and we now have 12 offices worldwide. Also in November 2022, we signed a term sheet to buy out our Thai distributor, and we plan to open up a Bangkok office by Q3 2023. Korea and Thailand were previously our two largest international distributors. Turning to Europe, we were happy to see Brussels pass legislation to defer the MDR deadline until 2027. We're still pressing ahead with the filing of our MDRCE marks. We've now filed 12 of our 14 MDRCE applications, and we will file the final two before the end of 2024. Indeed, in January, we received our first MDRCE mark for the Pruitt F3 Carotid Chunt. Q4 2022 was a record sales quarter for our EMEA team, a nice recovery from the somewhat difficult days of the 2020 Before turning the call over to JJ, I'd like to highlight several 2022 achievements. Number one, we grew sales 9% organically. Number two, we became a member of the Dividend Achievers Index. Number three, we built out Team LaMate with several headcount records, sales reps of 131, manufacturing personnel of 219, and total employees of 591. We continue to invest in regulatory approvals, including MDRCE applications, RFA allografts in the UK and Germany, and Xenosure patches in China and Japan. Number five, we continue to build out our APAC direct operations. And number six, we undertook a major factory and warehouse expansion in Burlington. I look forward to these 2022 initiatives paying off with improved top and bottom line results in 2023 and beyond. With that, Turn the call over to JJ.

Thanks, George. Q4 2022 sales were $41 million, an increase of 4 percent on a reported basis and 8 percent organically versus Q4 2021. FX headwinds continued to be substantial, and we lost $1.7 million in sales due to the strengthening dollar in Q4. For the full year, 2022, sales were $161.7 million, An increase of 5% on a reported basis and 9% organically. We lost $6.1 million in 2022 sales due to the strong dollar. In Q4 2022, we posted a gross margin of 63.6%, a decrease of 210 basis points versus the prior year quarter. The strengthening dollar decreased our gross margin by 150 basis points versus Q4 2021. And if we exclude this foreign exchange impact, our Q4 2022 gross margin would have been 65.1%. We increased our direct labor manufacturing team by 54% in 2022, and we increased our Burlington manufacturing footprint substantially. This increase in production will help us mitigate any potential issues related to the MDR transition, product line changes, supply chain disruptions, and lingering labor force scarcity. And while we are excited about the increased unit production, training our new and larger staff has been a challenge. and their inefficiency has hurt our gross margin. We expect to correct this in the coming quarters, and this should favorably impact our gross margin as reflected in our guidance. Q4 2022 operating income was $7 million, reflecting an operating margin of 17%. Operating expenses increased 8% in Q4 versus the prior year, as we continue to hire and invest in many areas, particularly our sales team. We finished 2022 with 131 sales reps. Despite this investment, we expect to slow the growth of operating expenses to 11 percent in 2023 from 15 percent in 2022. And as a result, we expect operating income growth of 19 percent for the full year 2023 and an operating margin of 18 percent. Headcount at the end of 2021 was 450. At the end of 2022 was 591. And we now expect to end 2023 at approximately 625. The cash on our balance sheet continues to grow. We ended Q4 2022 with $82.7 million, an increase of $3 million in the quarter and $12.7 million in the year. The Q4 increase was largely driven by cash from operations of $4.1 million and partially offset by dividends of $2.7 million. Turning to guidance, we expect Q1 2023 sales of $42.6 million to $45 million. which represents a reported increase of 11 percent at the midpoint and 13 percent organically. We also expect operating income of $6 million to $7.5 million, which represents a decrease of 15 percent at the midpoint. Our Q1 2023 EPS guidance of 22 cents to 27 cents per share implies a midpoint of 25 cents per share. For the full year 2023, we expect sales of $174.3 million to $178.3 million, which represents an increase at the midpoint of 9% on both a reported and organic basis. We also expect operating income of $30.6 million to $33.3 million, which represents an increase of 19% at the midpoint and 7% excluding special items. Our 2023 EPS guidance of $1.11 to $1.20 per share implies a midpoint of $1.16 per share, an increase of 24% and 8% excluding special items. With that, I'll turn it back over to the operator for questions.

Thank you. At this time, we will conduct the question and answer session. Please stand by while we compile the Q&A roster.

Our first question comes from Michael Sarcone of Jefferies. Your line is now open. Our first question comes from Michael Sarcone of Jefferies. Your line is now open. Sounds like maybe we move on from Michael unless he's there.

I don't think he is. I will move on. Please wait a moment while I compile our Q&A roster.

Thank you.

Our next question comes from Matthew Michon of Key. The line is now open.

Hey, good afternoon. Can you hear me? Yes, Matthew.

Okay, excellent. Yeah, the quarter was so good, I guess people are speechless. Okay, so… So let's just start with the first quarter guidance. And actually, no, let's start with the four-year guidance because I think that's more important. Where is the growth, the 9% growth coming from? How would you break it down between volume and price? And then what's specifically driving like the 9? That's just a really good number.

I'll give you a rough estimate on that. This is George. Thanks for the great question. I would say We think the price hike we installed was around five to 6% on January 1st in our various geographies. We'll see how much we get or not, but I would say roughly speaking, five and a half, 6% price and the remainder on volume.

Okay. And then as I think about the different regions, like where are you, where do you, where do you expect to drive the most growth or how do you, how would you kind of stay in between the Americas, Europe and like APAC?

Right. So, of course, on our guidance, we never really break up the future sales by geographies. It's just too hard. But I would say, in general, what we've seen for the last five years here is that APAC outgrows EMEA, which outgrows the Americas, sort of reflecting how new the territory is in Asia-Pac. It's a little bit less new in Europe for us, and then it's, you know, we've been here for four years in the U.S.,

Okay. And then the last question, just as I think about gross margin through the course of like 23, do you expect to exit like 23 with a higher gross margin than, I mean, obviously it's implied in your guidance with 64.8 versus 65.4, but where do you think you exit the fourth quarter of 23? Do you think you exit at a pretty good trajectory that starts to get you back towards that high 60s area?

Yeah, I mean, if you start fiddling around with that, the interval of the math that you just mentioned, you know, you're going to wind up doing something like that, I think. But obviously, we're not giving you guidance between quarters. But it's tough to make that math work without sort of doing that. One of the big topics for us, Matt, has been the inefficiency of our DLs as we've ramped up the size of that manufacturing group. And it's along two fronts. One is utilization. Are they working the proportionate amount of time that we want them to versus unutilized time where they're not directly working on something. And the other is productivity. When they are actually working, are they productive? And so the reason I'm telling you this is because it's an operational challenge to catch up to that, which we will, but it'll take a little time to do that. So you can sort of reflect that in your numbers as you walk through the quarters of the year, how we might recover from that operationally.

All right. Thank you very much.

Thanks a lot.

One moment as I prepare the roster for the next question. Our next question comes from Rick Wise of Stifle. Your microphone is now open.

Hey, good afternoon. This is John for Rick today. Just to start off looking at the full year guidance for 23, A bit of a range there. I'm just wondering if you could add a little color on what gets you to the higher end, what pushes you to the lower end? What are the kind of key headwinds, tailwinds, crosscurrents you're seeing as you look ahead into 2023?

Hi. Okay. I'll try to help with this one. This is George. Things that could make it go better, you know, if the price hikes all stuck, you never know when you put a price hike in how much it sticks. Maybe how much the turnover would be with the sales force. We've got a lot of new reps here. See what that looks like. It's been fantastic for the last eight months, a very low turnover. But I guess that would push things higher if we had lower turnover and vice versa if we didn't. Those are a couple of the things. How quickly the Korean subsidiary takes off. It's only a $1 million business, but that's of interest to us as well. How long it takes to get the carotid indication in Japan. is actually kind of key. If we got it in Q1, you'll see Japan accelerate in growth, and if it takes till Q4, it'll be a little bit worse, but I've never really been asked that question that way, but it's a good question. It's a creative question, and there's so many moving parts. That is why we try to give a range, although how wide is the range? $4 million is the range, and you do have a taste of how close we are, and I think this quarter we were like within $100,000 of the actual number, so at least for this quarter, our sort of range-finding machine worked.

John, I'd give you maybe another lens to look through it. The four or five big product lines driving growth next year are artographed, valvulatomes, patches, shunts, and restore flow. And they each have their own story. So to the extent that you can be on the right side of all those stories, you'll be on the higher end of the range. And to the extent that you won't, you'll be on the lower end of the range. Arter graft is a story of gaining sort of some unit traction these days post-acquisition. And to the extent that we get some of that, I think that will be helpful. Valvolatomes is the pricing topic largely that George talked about, but maybe some units as well, but mostly pricing, et cetera, et cetera. So there are different product-by-product stories that will drive us higher or lower. But those are the five to focus on, I think.

Great. That's really helpful, Culler. I appreciate it. And just as one more follow-up question, you talked about adding reps in 22, and you're basically at the level you want to be at now. Last year, just to put it from a financial term, sales and marketing grew like 19-ish percent. Top line is like 8% to 9% organic. On that line for 23, should we be expecting more leverage? Is there a way we should be thinking about it as these reps ramp up and And what's kind of a longer-term expectation for you guys for SM growth as you reach a more steady state from a rep perspective? Thanks for taking my question.

Yeah, maybe I answer it a little bit more generally and just talk about op expense in general because the heart of the op expense growth is the Salesforce growth. We feel like last year, I don't know, employees were up at 31%. Reps are up 27%. DL is up 54%. We really went, not crazy, but we went to the mat to fix all kinds of issues around here. But I think we're all committed inside the building of, hey, that was a special year, and you can't let off expenses grow as much as we did last year. So we're putting some kind of a clamp on ourselves of 625 as the max employees at the company this year. And I think that will help start to drive operating leverage. We used to have operating leverage and over the last two or three years we sort of lost that leverage. And I think we're trying to find it back by limiting our growth of headcount. And hopefully at some point the op expenses grow less than the gross profit grows and we get some leverage.

I think I said in my script that op expense grew about 15 or 16 percent last year. We're looking at closer to 10 or 11 percent this year. And you can do the same thing we just did with gross margin, look at the Q1 OpEx sort of guidance that you can impute with the year, full year, and then sort of assume a cadence throughout the year to get there.

Thanks. Thank you. Thank you. One moment while I prepare the queue for the next question. Our next question comes from Michael Patisky of Barrington Research. Your line is now open. Mike, how are you doing? It's George in Burlington.

I'm sorry, am I on?

You are. Yeah.

Sorry, I did not hear who was supposed to be on. Sorry, I apologize. Great. Okay. Fifth call of the day. So if I'm asking something that's been already asked and answered, forgive. Update on M&A Pipeline. Any commentary there? Anything to say?

Yeah. Hey, Mike. It's Dave. I would say no real update. You know, we continue to be focused on devices, product lines, companies in the open vascular surgery field with disposables and implantables, over $5 or $10 million of revenue. There are probably two to three dozen legit targets, and we're in touch with them. We like, you know, niche, low rivalry markets. So we're out hunting. We've sort of expanded the target area a little bit. We're looking a little bit in cardiac surgery, a little bit in endovascular as well, but I don't think I have anything really material to report. Obviously, the cash balance is growing, so we can do larger deals, and we are looking, I would say, on the margin at larger targets these days. So, we're out hunting, but I don't have anything to report. We didn't just sign a deal that I'm reporting on today.

So can I just ask, obviously, it's been a while since sort of the needle-moving autograph. Have you gone down a track with any, like, meaningful, you know, what I would consider more meaningful assets where just ultimately either something in the product?

Yeah, if I understand the question correctly, yeah, I mean, we have been, we have evaluated, we have made bids. on assets of a reasonable size. I can think of, you know, a couple in particular that neither one of them transacted, so they're still out there, and they didn't happen for various reasons. So, you know, we are, you know, we are looking, but we just, you know, haven't found anything with what I'd say a perfectly willing seller at a reasonable price. And so, you know, our feeling is let's just wait for our pitch and find something that's right, and we'll pull the trigger when that happens.

That's what Warren Buffett says. All right. On Artograph, would you guys be willing to share what type of level price increase you put through on Artograph this year?

Yeah, we would be. You know what? I'm sitting here going, I think it was less than it was the year before. I don't have the exact number right now. I really should. I think it was like 6% or 7%, and I think the year before it was 12%.

I think it was 11% last year.

11% last year. I know you didn't ask that, but I think it was considerably reduced this year to something like 5% or 6%. I apologize for not having that number at my fingertips. I should. Directionally correct, though, I think.

Okay. All right. And, JJ, I was just real curious on tax rate and then R&D related to MDR. It sounds like you guys have made some great progress in getting the filings Does that mean that R&D sort of flattens, or is there a lot of expenses between now and, you know, the next year or so?

You know, we talk about it potentially flattening, Mike, but I'd say it'd be up modestly, you know, that kind of thing. Not as, you know, we're not sort of the wide-eyed guys on that like we were a couple years ago when we were going to have to spend more under control, and it's a little more reserved in terms of the increase, but still increasing a little bit. I'd characterize it that way. And then on the, yeah, the tax rate was high this quarter because our spend on product development was down a little bit this year. And so we got less of an R&D credit on that. And then there were some officers' compensation that we were not able to deduct at the end of the year for tax purposes. So the Q4 rate was a little higher. Going forward, you can sort of think of us as the 25, 25.5% guys.

All right, great. Thanks so much, guys. Appreciate it.

Thanks, Mike.

Thank you. One moment as I prepare the next question.

Our next question comes from Brooks O'Neill from Lake Street Capital.

Your mic is now open.

Thank you. Good afternoon, guys. It's rare that my finger is slower than Petoskey's, but I guess I got on a little bit late today because I, too, was on another call. Just want to say, I think last quarter was the event of George's new child coming to the world, so I hope things are going well with your family, George, and I'm glad to hear you back on the call this time. So my question quickly is just sort of macroeconomic factors. I think last quarter the dollar's strength was a had a big impact on results. And you might have said this earlier in the call before I got on, but can you just give us a sense for how currency and some of the various macro factors are affecting the business, particularly outside the United States? Thanks a lot.

You know, Brooks, maybe JJ can handle the currency stuff after I get through this little thing. But You know, there's a couple articles I've been reading about staffing in American hospitals, and I know you asked for international, but I think, you know, our business is kind of 67% North America now. I think we are starting to look at, wow, the hospitals are being correctly staffed and fully staffed, and it's been a long time since we made an excuse about why sales weren't up because of COVID and COVID staffing. But I do feel like in the last two or three months or four months, The staffing levels have been better, and we're reporting cases are going off like they always used to go off, and it's not being slowed down because they couldn't get a bunch of contract OR staffers in to help push the beds around. So we're quite excited about that, and I think we can feel that when you talk about macroeconomics from us. And as for the currency, maybe JJ's got some insight on that. So I'll try and... Thank you.

I'll try and make it sequential here, I guess, in a way, because it is turning on us in terms of the dollar weakening. But in Q4, the FX hurt us year over year for about 1.7 million reduction in sales. And then for the full year last year, it was like 6.2 million, something like that. And then in Q1 of this year, 23, Maybe it's a 1.1 million or so bad guy year over year. But then, Brooks, it starts to change. As last year's rate came down and this year's rate is starting to go up, those two are starting to cross. And so when you get into Q3, it starts to be a help year over year. And by the end of the year, you're kind of neutral in 2023. So you can sort of not think about FX for the full year 2023. Great.

Great, guys. Thanks a lot. Thanks a lot, Brooks.

Thank you. One moment as I prepare the next question. Our next question comes from Jim Sidoti of Sidoti. Your line is now open. Hi, good afternoon, guys. Thanks for taking the question.

You know, I'm looking back over the last five or six years and You've never grown Q1 $2 million off of Q4 the prior year before. Is that related to the backlog for OmniFlow?

No, it's not precisely related to that. That's not that large of a factor. It's some of it in there, but no, we just feel like it's a very good quarter. And you're right to pick up the sequential cadence. It's pretty rare that that happens. I'm glad you're following us that closely that you're watching that.

Okay, what exactly happened with OmniFlow and how material is that?

Sure. So OmniFlow is approximately a $5.5 million product when it's running correctly. In the transition from Melbourne, we used to make it there and now we make it in Burlington. In that transition, we messed up the transfer and some of the qualifications didn't work out. We kind of got it started in Q3 and we hit a little bit of a speed bump with some of the sterilization validations. Those have now been sorted out as of January, and we are shipping to our, it's mostly European product, Jim. So we're shipping to our European headquarters right now, and we are actually selling devices now. So we've broken through the, it was basically a shutout for November and December, and we have indeed broken through that now, and we're selling. But so, you know, $5.5 million product line in a great quarter, what does that mean? It's selling 1.75 or something a quarter. And I think in Q4, if I remember correctly from the charts I was seeing, we sold about $700,000, $600,000 worth of it. So we still have to catch up to that and then go a little further. So that's why it isn't such a big difference between Q4 2022 and Q1 2023, because we did sell stuff in October. And now we're going to sort of February and March, we're going to be selling stuff against that October sales. So not exactly because of that. It's a good quarter. We don't exactly understand why it's such a good quarter. Maybe some of the hospital staffing comments I was making to the last question from Brooks are sort of an indication of one of our hypotheses. We also have a pretty robust price hike on one of our valvotome product lines called EasySite, which has always been sort of priced as a junior valvotome option, and now it's priced exactly at parity with the regular valvotome. So we've got a little price hike thing there, which may be a nice difference between Q4 and Q1. as well.

Okay. All right.

And then I hope that actually my next question.

Yep. No, that's good. And my next question was already to Val, you told me the last quarter you said you had a bit of an air pocket there. Did that come back to normal levels in the fourth quarter?

Yeah. So yeah, that's right. Good. Great memory there. Yes. I think we called it an air pocket on the call that I wasn't on. And then it was up 20% into Q4 sequentially. And better news here is that it feels nice in the start of Q1. So, yes, all repaired. Everything's fine. It's better than fine. Sorry.

Okay.

Last two for me. The guidance implies a pickup in other income, it seems to me. Is that just the growing cash balance and the better interest rates?

Pickup in other income. Let's see.

It just, you know, if you put that

You put in your revenue. Yeah, I can tell you, Jim, down below op income, there's two larger drivers. One is interest income, which has been improving for us. And so maybe there's a little bit of a pickup there. And then in the other, there's FX related to intercompany transactions and other items. And so given the swings in FX, that's had an impact there as well.

Okay, and then the last one for me is on the PP&E, property and equipment. You know, that started off the year at around $17 million. It dipped down to around $15 million in the third quarter. It's back up to $18 million now. Is that the new equipment in the expanded capacity in Burlington, or what's driving that?

Yeah, I mean, we've been, so in the last quarter, Q4, we spent $1.2 million on CapEx. We have been spending on the expanded clean room that we talked about, which is significant, but yeah, that's probably a big piece of it, too, and I'm trying to think of other larger CapEx.

It's in the neighborhood of $3 or $4 million, though. Were you saying numbers like $18 million, Jim? I'd hate to have people walk away thinking that, because that's not what we're selling on. Yeah, it would be.

No, you ended the year with $18 million total on property and equipment.

Yeah.

Okay.

I mean, I can get back to you with the pieces of that, Jim, but I'm going to guess clean room build-out is a big piece of that answer.

So it feels like, you know, you have the people and the capacity in place now so that if demand does continue to grow, you can handle it without any major investments.

Yeah, I mean, I think we feel like we're happy already. Unit growth is positive, and so we're glad we have it. You know, we're no backorder company, and so we've had spikes and sort of peaks and valleys in different unit growth areas, and we've been able to cover those because of the expanded clean room and the expanded size of the manufacturing folks. Anything around regulatory issues, it gets a little hairy sometimes. Those can be covered up with a little bit more inventory made by, you know, more folks. So I think strategically, not financially necessarily purely, but strategically, it's been a really nice answer for us, that expansion.

So, you know, if you look back four or five years, you guys were north of 20% on the operating margin. And I know you're not going to get there this year, but do you think at some point in the next two or three years, if The revenue grows now that you have this infrastructure in place, you can get close to that 20% again.

So Jim, if you look at the Q1 op margin, 15%, and then you look at the full year, 18%, you know, you obviously got to improve from that 15% and then some to get to the full year answer. So I think implied in our guidance is some nice improvement on the op margin. You know, we're not giving you the interim quarters, but you can play with it and try and figure out where you would get to. So I would say, yeah, we definitely would expect to get back to 20%. That's certainly where we want to be and beyond that. Okay.

All right. Thank you.

Thanks, Jim. Thanks, Jim.

Thank you. Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation. You may now disconnect and have a great day.