LeMaitre Vascular, Inc. (LMAT) Earnings Call Transcript & Summary

Good morning, and thanks for joining us for our next session here at the UBS Virtual Global Healthcare Conference in the MedTech track. I'm Matt Taylor, UBS U.S. medical supplies and devices analyst. And I'm really pleased to be joined by management from LeMaitre Vascular. This morning, we have joining us, Dave Roberts, President of the company. And for this session this morning, Dave is going to go through some opening comments to make a little bit of an overview of the company and what it's been going through, and then we'll move into a moderated Q&A session. As always, if you have questions that you want us to ask, please shoot me an e-mail or you can ask them through the webcast. And with that, Dave, thanks for joining, and let me turn the floor to you.

Thank you very much, Matt, and thanks to UBS for having LeMaitre Vascular present today. As Matt mentioned, I'm the President of LeMaitre Vascular. I've been with the company for 23 years. I was the 12th employee. I was previously CFO. And these days, I spend most of my time on acquisitions as well as other business and strategic matters. So our slide deck -- it's about 20 slides, but I imagine many of the folks listening have already seen the slides. I'll give a brief -- I'll probably only speak for about 5 or 10 minutes. The Q&A is always more interesting, so we'll leave plenty of time for that. So let me just jump to the -- well, the second slide talks about all the information in the deck is as of March 31. So the lawyers like me to mention that. If I go to the investment highlights, what's unusual about LeMaitre Vascular is we're a medical device company, a little over $100 million of sales, but we're highly profitable. And something else that's unusual in these days, because these days are unusual, is that at the moment LeMaitre does not have guidance out for 2020. So we had -- we pulled our guidance at the beginning of April. I think maybe a lot of companies did that. And then when we had our earnings call about 3 weeks ago, we did not update or issue new guidance. So I may get questions about that. But other aspects of the business, just to highlight, on Slide 3, is we have a sales force, which we've reduced in size a little bit, but it's still fairly large at 87 sales reps as of Friday. And you're going to hear a little bit more that we do acquisitions. So just jumping to the next slide. Again, what you see here is a company that's fairly profitable with an operating margin up near 20%. When you include in the acquisitions, our growth rate reported is a little over 10%. The CAGR is 11% over the last 5 years. And when you strip out the acquisitions, the organic growth rate these days is more mid-single digit, sort of 5%, 6%, 7%, in that range. Our strategy is we're trying to be the big fish in a small pond. The small pond is the field of vascular surgery, the procedures that vascular surgeons do and the devices they use in those procedures. And I include in that the field of dialysis access. It's heavily overlapping. And then secondly, the products where -- we have are in niche markets. We're not trying to play in large markets against large competitors. You can see on Slide 6, we call primarily on vascular surgeons. That's where our reps spend 73% of their time. A little bit more recently in cardiac surgery. We completed an acquisition just in October of a company -- excuse me, a couple of product lines. The main one is mostly used in cardiac surgery. And Slide 7, as I mentioned, we like niche markets. We -- all the markets that we participate in are less than $200 million in revenue. And we'll talk more about current revenue. There's a TAM figure on here of $900 million, but the $750 million is more of a current market size. And then Slide 8, the products in the bag. We have a diversified sales bag. Sometimes people think of us as a mutual fund of vascular devices. So you see 9 of our products pictured here in 8 different images. Image 6 has 2 of our products. These are 85% of our sales. And one way to divide up the bag is what percentage of our products are implantable versus disposable. And then even within the implants, we focus more on biologics. I can come back to this slide if Matt or others have questions about it. But on the next slide, on Slide 9, you can see that these days about 40% of our sales are in the biologics area. So shifting gears and talking about the sales force. We did take the sales force down in size a little bit. I will show you that on the next slide. But on Slide 10, what you can see is we have 87 sales reps, most of which -- they're spread pretty evenly between North America and Europe. However, we have a nascent, albeit growing sales force in Asia Pac Rim. And during the COVID times, that's where, actually, ourselves have been least affected. So that's been nice to see. We also have 11 sales offices around the world. And on Slide 11 is where you can see, we've taken the sales -- the size of the sales force down over the last few months in February. We reduced the sales force a little bit in size. We had a RIF then of about 31 people, some of which were sales reps. It wasn't 31 reps. But that was for general belt-tightening. And then when COVID hit, we decided it would make sense to reduce the sales force further because, frankly, many of the reps couldn't get in the hospitals. And it was unclear then and still a little bit unclear now exactly how long reps will be able to -- when they'll be able to return to hospitals. So when we think about where to go direct next with our sales force because we do sell direct in 24 countries around the world, of course, a precedent topic to that is where do we have regulatory approvals. So on Slide 12, you see a chart, a matrix, if you will, with our sales approvals in markets, countries where we're selling direct to hospitals. And there is one update on this slide. I guess the update here is in Japan. We got a surprise approval for XenoSure in the last few weeks. And so you can see there's a cell colored green there. It can sort of be hidden in terms of a lot -- there's a lot going on in this chart. But that was important for us. We didn't really expect it. And so that was a pleasant surprise. And so previously, the percentage of Q1 2020 worldwide sales that are -- that the approved products represent Japan was only around 50% or high 40s. And now we're selling, if you will, 69% of our bag in Japan. So that was a nice development for us. The next slide, I'll pass over, talks about our approvals in distributor markets. And then I'll jump into how we add products to the bag. We spend about 8% of sales on R&D. I think, in Q1, it was more like 10%. That's because we're doing more regulatory spending these days with the transition from MDD to MDR. But I would say, if you say it's 8% normally, maybe 3% of the 8% would be spent on regulatory work, 3% would be on process engineering for factory consolidation. So the true new product spend that we'll make is pretty small. It's about 2% of sales, so call it, $2 million or $3 million a year. And most of what we're doing is next-gen products and adding SKUs. We don't do a lot of pure new product development. That happens with acquisitions, which is the subject of Slide 15. And on that topic, that's how we bring most new products into the bag at LeMaitre. We do about one acquisition per year. And if you look at our sales in 2019, almost 45% of the revenue at LeMaitre is from growth of the products we've acquired. So we acquire products, we add them to the bag, and then the sales grow. So the next slide -- again, this is a similar format to Slide 14. But on Slide 16, you can see our track record in acquisitions. We're always -- every quarter, we look at all the acquisitions we've done. Of course, the cement has dried on many or most of these, but some were -- we tip into different buckets. And I'd say the companies or my track record in acquisitions is 14 wins and 6 losses. And 3, we're not sure yet or too close to call. So that's how we look at our track record at deploying capital for acquisitions. The last couple of few slides are about -- a little bit more on the financials of the company and then a little bit of investor relations stuff. The sales are high quality. The gross -- we've seen a little bit of slippage in the gross margin over the last year or 2. That's driven a little bit by the growth of XenoSure slowing down and us having to reduce price to compete in the biologic patch market. I would say, in general, price increases have been tougher to come by, XenoSure aside. So -- and also, we've had a mix shift a little bit towards allografts which come from human cadavers. These are veins used primarily for peripheral bypass. And just due to the nature of the supply chain, the margins on those products are lower. So that's been a mix shift and taking the gross margin down a little bit as well. But we're highly diversified by product. Our biggest product is the bovine carotid patch. It's at 20% of sales. The middle pie chart, you can see pretty diversified geographically. We get about 55% of our sales in the U.S. And in general, I'd like to say we're allergic to distributors. We really like selling direct to hospitals ourselves, and that's 94% of our revenue. Slide 18, you can see some of the operating margin headwinds recently that we're trying hard to fix because operating profits and profit growth is -- continues to be the North Star at LeMaitre Vascular. We generate nice EBITDA, as you can see on Slide 19. We entered this whole COVID pandemic with a really nice balance sheet, over $30 million of cash and no debt. So that was good for us. I think we're a pretty conservatively run business in terms of: a, our goal to be profitable and highly profitable; and b, with respect to our balance sheet. The last 2 slides in the deck are about the ownership and a little bit on trading, the uptake of institutional owners in the stock. And then the last slide, here, you can see who holds the stock on the left. And then we have 6 analysts covering us today. We had 7, and one of them got out of the business, so we're down to 6. And then there's a report card on the lower right. This is the last comment I'll have before we go to Q&A, which talks about what percentage of the time LeMaitre achieves the midpoint of our guidance when we guide on sales, op income and EPS. So we've been public for about 15 years, and you can see our track record. It's not ideal. Frankly, it could probably be better. But that's LeMaitre. And so Matt, I'll turn it over to you. Thanks. I know that was quick, but I hope that's a good enough overview.

Thanks. Yes. And Dave, that's a great overview. Thanks for starting off with that, and I'll follow up on a bunch of the points you made with the questions here. I think, firstly, maybe we could just review 2 things. One, I'd like to understand better the main kind of factors and products that you had that were driving growth, sort of pre-COVID, touch on a few of those and what you expect to do well coming out of this period of disruption. And then just remind us the impact that COVID had in your Q1, if you want to do it by product or by region, that would be helpful.

Yes. So I'll go to Slide 8 and just talk about pre-COVID. So again, these products that you see on Slide 8, these 9 products are 85% of the revenue. I would say, in general, what had been driving growth was the allograft business had been very strong for us as well as embolectomy catheters had been strong. I would say those have been 2 consistently high performers for us. But it's a real diversified bag. And so at different times, different products step to the fore. I would say the theme I mentioned was that patches had been fueling growth for a few years. But over the last year or 2, our XenoSure patch -- more competitors entered the market. And that, frankly, was -- one of the reasons we were interested in acquiring the VascuCel patch from Admedus was -- It was sort of a next-generation patch, which would allow our patch category to perhaps start growing again. So the growth was fairly spread out, somewhat balanced. And then when COVID hit, I would say the products that have really done well during COVID have been the -- I would say, maybe, first and foremost, is the embolectomy catheters. And that's the product shown in Image 3. And that's just a balloon on the end of a catheter. The one there -- that's shown there is an over-the-wire device. But basically, what that's used for is removing a blood clot. A blood clot forms, and you insert the catheter into an artery or vein, push it through the clot, inflate the balloon and pull the catheter out with the balloon inflated, and the clot comes out being pulled by, if you will, the balloon. And so those blood clots that embolectomy catheters are treating are soft clots. They're clots that have just formed. So if a clot forms in an artery in your leg, suddenly you're not getting blood to your foot. And that's sort of -- let's call that an emergency situation. Those products are -- have done very well. Frankly, some of the other products have done okay. But I would say, on the whole, the products in the bag, there's been -- there was sort of a uniform effect of COVID on the products in the bag. I'd say the one product that got hit a little bit harder than the others isn't shown on this chart. It's a product called TRIVEX. And TRIVEX is a product that's used to treat varicose veins, and that product has been hit hard, although that's only about -- I don't know, it's 1% or 2% of our sales. And so it's not that material. So that's how -- that gives you a view of the products. And then in terms of -- when we started to feel COVID in Q1, like probably everybody else, and frankly, it was towards the end of Q1. In mid-March, that's when we started to see the revenue disruptions. And where we saw it first was in Southern Europe, Italy. In Italy, our sales were down about 14% in Q1. And France was down 10%. But really, Italy and France, we're doing quite well, like the rest of our business. And then it was really the back half of March where we felt it. I'd say the one country where we felt it throughout Q1 was in China where sales were down 70%, but China is only 1% of our sales. So the total effect of COVID on Q1 -- and we're not really talking about April and May and all that. We're -- just because we haven't provided guidance. But in Q1, the total effect of COVID was about $500,000 to $1 million. We were fortunate in that we still finished the quarter within our guidance range. We missed the midpoint, but we're above our low point despite the fact that COVID affected us. So if not for COVID, it seems like it was shaping up to be a decent quarter. But what can you do?

Okay. Great. So on the guidance, obviously, you pulled guidance, a lot of companies did because of the uncertainty. You had made some references on the call to the fact that the lion's share of the procedures would come back. And obviously, you treat a lot of pretty serious conditions with your products. Maybe you could just frame things up that way and talk about deferrability of some of the procedures, why you think the lion's share will come back. And can you give us any sense for how urgently some of those things need to be done?

Yes. I mean, when COVID first hit, I thought LeMaitre -- I personally thought LeMaitre would fare a little bit better than perhaps other companies because, frankly, except for that one TRIVEX device, which is used for varicose veins, all of our other devices -- in other words, 98% or 99% of our sales are used to treat vascular disease, and these are generally not -- these are not like aesthetic procedures. These are procedures that a patient needs. That being said, we've heard a lot in the news about how fewer patients are being treated for heart attacks and strokes because patients don't want to go to the hospitals these days. So I think LeMaitre has felt the effects of that with our products as well. In terms of the urgency associated with the products, I would say, many of the products -- some or many of the procedures in which our products used are deferrable. But frankly, if you have plaque in your leg or the aortic -- your aorta is thinning and aneurysmal and it could rupture, those are situations that don't resolve on their own. The diseases -- the disease states are progressive, and they only get worse over time. So that's why we believe that unless the patients die, which, unfortunately, with COVID, some are, and they're mostly older. But as you look at the percentage of the population that's dying, it's very small. I don't want to sound dispassionate about it, but it's very small. Unless the patients die, they will need these procedures. So we do think that the patients will come back. In terms of the time frame, I think it differs. For example, even patients who are -- who need treatment for stroke, some of which is caused by the dislodgement of plaque in your carotid artery and that plaque embolizing towards the brain, that's when a carotid shunt would be used. And I would have thought our carotid shunt business would have been relatively unaffected, but it was affected. However, that's a very dangerous situation. So I think products like the carotid shunts or -- for critical limb ischemia, where a patient has a choice of going to the hospital and getting their leg treated or not going and maybe having their foot amputated as a result later, I would expect the products that are used in carotids or most of our peripheral products, those are products that would come back a little bit faster. If I were to single out one that might not come back faster besides TRIVEX, it would be a product that's used to create fistulas, which is our anastomotic clip system. And that's because that product is used to -- used primarily in dialysis access to create a fistula. And there are other ways to create accesses. For example, dialysis access grafts or catheters. And so fistulas take a while to mature. They're a better solution, but they take a while to mature. And there are alternatives that -- where patients can receive access -- dialysis quickly. So that's one where maybe we would see it more of an impact in the near term, but it's a little bit of a range of responses based on the exact disease states, which the products are treating.

Okay. And maybe you could also just talk about the things that you're watching. As a company, what are some of the leading indicators that you look at to try and understand how your business will start to come back during this transition period?

I mean, I think, for us, the most important indicator is whether elective surgeries are being allowed in various geographies. There are parts of the country -- many parts, where elective surgeries are not being allowed. There are some parts where they are. There were some parts in April where elective surgeries were continuing. I did a focus group, and I spoke to a handful of surgeons in various cities or towns in the Midwest, and they have seen very little COVID. However, now, as we all know, COVID seems to be moving from the coast maybe to the middle of the country. And so now their elective procedures are slowing down. Whereas on the coast, maybe it's picking up. So it's really -- it really goes in waves. We see maybe the beginnings of a return to elective procedures in Italy, which was -- it's a fairly important country in terms of sales for LeMaitre. And it was hit very hard, as we all know, very hard and early. And so we're seeing some of that. So I would say the return of elective surgeries is probably the most important indicator for us.

Got you. Okay. All right. And then I wanted to discuss a few further things that you mentioned earlier on the call that are impacting your business. One was you talked about the fact that you had some belt-tightening that went on with the reduction in force and some measures to reduce costs. Can you talk about the different components of that? And then how much of that is temporary? What would you do if things were to return to normal, let's say, in Q4 next year?

Right. So in February, we reported our Q4 to Wall Street, and we had missed our numbers, not by a lot, but by a little bit on the -- yes, maybe at the top and the bottom line. And we had done a handful of acquisitions, Matt, and frankly, had more of an expense load and expense base than we thought we should have. So in the middle of February, we did a RIF. And the first RIF was -- I believe, it was 30 -- 33 people. And that was what I would call just general belt-tightening. That was really before we were appreciating the full effects of COVID. And then about a month later, when we started to see the sales effects from COVID, first out of -- well, in China, a little bit early on, but mostly in Southern Europe and then it came to the United States. We felt like we needed a response because, again, LeMaitre is very focused on profits and profitability and cash flow. So there were 2 components in April to the belt-tightening. One was the -- another RIF, a bigger RIF of 51 persons. So on a combined basis, that's 84 persons. And it took us down to 375 employees. And that's -- that was, on a combined basis, 18% of our headcount. And then also, in mid-April, again, just to weather the storm and not knowing how long the storm will last, we implemented salary reduction inside of LeMaitre. And so it affected all individuals at LeMaitre who are earning more than $40,000 a year. On average, I think it was around 30% base salary reduction from mid-April through the end of the year, but it was progressive. So for example, I forfeited 50% of my base salary through the end of 2020, and so did our CFO and our CEO, gave up 90% George with his. So when you combine the 2 RIFs plus the salary reduction, that would -- that should result in net savings of about $13.5 million in 2020 or 14% of our spending, so -- of our 2019 spending. So it was fairly substantial. And our thought was, we don't know the magnitude and the duration of COVID. And the cost of underestimating it are higher than the cost of overestimating it. And so we felt we ought to take those steps, and we did. Okay. So now which are permanent versus not? I mean the RIFs, we didn't, generally speaking, do furloughs. I think there may be some furlough programs over in Europe. But generally speaking, these are permanent reductions in force that employees aren't -- those employees that we let go aren't thinking they're coming back. If the effects of COVID are less than we expect -- and sure, I mean there's -- and when we let go of a lot of people, and it was really across the board. It wasn't just the sales force. It was a lot in operations, in direct labor and other parts of the business. So if the sales came back, then there are a lot of important roles and functions that we would be seriously considering bringing back over time. The way we viewed the pandemic was there's the health -- the Phase 1 will be the health effect and the recovery of that, but then Phase 2 would be what happens with the economy afterwards and the recession and all that. Because even when the pandemic is done and elective surgeries return, especially in the U.S. with the high co-pays and deductibles and all that, recessions do have an effect still on our business. And so we want to be mindful of that as we were dialing up or down our response to the pandemic. So -- but as it comes back over time, yes, we do picture we would hire various positions back, but we're going to be most mindful of the bottom line and our ability to generate profits and generate cash flow and ensure the business is strong and healthy as we move forward.

Got you. Okay. Right. That makes sense. And when you look at the future, do you have any thoughts on what 2021 or '22 should look like? Just with the context of these being progressive diseases, do you think that it's possible you could get to levels of sales in 2021 that you thought before? Or do you think because of what's happening that you'll see some patients shake out or kind of fall through the crack?

Yes, it's really hard to say. I mean, I would say if there were no recession, then I would expect the -- a lot -- if not all, but nearly all or a very, very large percentage of the procedures which were deferred to start taking place. Now there's a question logistically in hospitals which is, how do the vascular surgeons get the OR time, right, versus all the other specialties whose procedures were deferred also? But again, if there were no recession, I would say -- I think that, that would bode well for 2021 and 2022. I feel like -- and then we have to layer in the recession. And for me -- and that also presupposes there aren't big multiple waves of the pandemic, which I'm hoping -- God forbid, there's not, but I guess none of us know for sure. When you layer in the recession, it becomes a giant question mark. Because how will the economy respond? And will there be a recession? And how deep will it be? That could affect us, I'd say, more in the U.S. than OUS, but it would affect us OUS as well. So really, really difficult to say. I mean, frankly, we never -- we wouldn't give guidance beyond the current year anyways like most companies. And I know you're not asking for that. But part of the reason we don't is, even without a pandemic, sometimes it's difficult for us to know exactly where our sales will go, et cetera. So -- and with the pandemic and then a possible recession layered on top, it's -- I suppose it's just even more difficult to make an accurate guess. So -- but those are some of the puts and takes that we think about as we look forward a year or 2.

Maybe I'll just follow up on that and ask you, when you harken back to the experience from the global financial crisis, when we did have double-digit rates of unemployment, is there any lesson or even numbers that you can draw from that to help investors better understand the economic sensitivity of your business?

Yes. I think there are. I mean, I would say that -- I mean, in general -- I mean, the nice thing about being in health care and medical device and vascular and what I call nondiscretionary procedures is, generally, it's a really good place to be. So as you think about '08, '09 and all of that and the Great Recession, I mean, by the time we got to 2012 and '13 and all that, we were in the 8%, 10%, 12% organic growth rate zone. Now some of that was the uptake of XenoSure. But I would say, at a high level, we generally performed well in good times and bad. But I would say, when there's a recession, it does affect us a little bit in terms of, as I mentioned, the deductibles and the co-pays and all that. There's maybe a little bit of an effect. But at a high level, I think we feel -- we're fortunate in the space that we're in and we feel the patients need to have these procedures. They need the vascular surgeons to fix the plumbing that's carrying their blood around the body. And our devices are helping them do that. So I think, on the whole, it's a good space to be in.

Great. There's another topic I wanted to touch on because you had some unique experience with this, given the severity of COVID in Massachusetts. You disclosed on your call that you had a few employees that had been diagnosed with that and you had to go through the process of shutting down your clean rooms for a short period of time. So I guess I was hoping you could speak to that and then some of the operational challenges you had to work through to keep running at normal levels and shore up your supply chain and things like that.

Yes. Well, when we reported earnings, we were only aware of 4 cases of COVID inside of our company. And still, I believe we're only at 4. I haven't heard of more, and I believe all 4 of the employees have recovered. And so that's -- first and foremost, that's really good news. We took a lot of measures upfront, I'd say, to prevent the spread of COVID inside of the business. So -- and one of the -- because we're an essential business, we've continued operating throughout the pandemic. But one of the -- aside from all the normal social distancing and wearing masks and taking temperatures and all that, I think one of the most effective steps we did was we went from a single shift of 8 hours to 2 shifts of 6 hours a day, and we went -- and then we extended from 5 to 6 days a week. So a typical clean room worker, instead of getting 40 hours working Monday to Friday, would work for 36 hours from Monday through Saturday, but the density in the clean rooms would be half of what it was. And that turned out to be a real good move for us. And so maybe that's helped prevent a spread inside of the business. Who knows? But -- and then on our supply chain, we've been lucky. We have not experienced any material COVID-driven supply disruptions. I do -- I'd say that part of our chain where we may hear the most stories about it would be in allografts because we source from recovery centers. And so there's a little bit an effect there. But -- for example, we source some of our xenograft tissues from slaughterhouses. And you hear about these meat packing plants and the effects of that. But luckily, we haven't been affected or affected in any meaningful way from that. And so -- and then all of our plastics and metals are still coming in without any -- without a hitch.

And what about for your R&D investments in your pipeline? Can you talk about how COVID could impact that? What programs are you preserving? And what should be impacted or delayed there?

I'd say that -- so we -- when we did the reduction in force, the R&D department was impacted and -- like all the other departments in the business. And -- so remember, R&D, it's not just new product development. It's sort of process engineering, which is a lot of factory relocations, and then it's regulatory. I would say the part of R&D that maybe was affected the most would be the new product development, which is, I'd say, the most offensive aspect of R&D. For us, we still have, I think, 5 remote factories in LeMaitre. We're on the verge of consolidating one right now. And another one, we expect to close Australian factory at the end of May or in June. And so we'll be down to 3, but -- and so for us, continuing the factory consolidation program at LeMaitre is really important. And then what's probably the most important is maintaining and preserving our regulatory approvals with the new MDR laws and so regulations. And so that part of our R&D spend was relatively less affected. But I would say new product development is probably more affected. So we've probably slowed some of the projects inside of that. And then the other, we're not a heavy clinical trial-driven organization, but one of the effects that we could be experiencing from COVID is in China. We have a trial in XenoSure. And there's follow-up. Patients have to come back to the hospital to -- for follow-up after they've had XenoSure implanted. And so it could be affecting how many patients are returning for follow-up. And we're just looking at that now. I don't have any conclusions on that, but it could be affecting that also.

Okay. All right. Well, Dave, I think we're about at our time here. So I think we'll call it a wrap, but I just want to thank you so much for spending time with us and with investors today. I know people really appreciate it for these kind of touch points during a busy time for your business and uncertainty. And...

Well, I appreciate the opportunity to participate. And I think it's wonderful, Matt, that you and UBS have pulled off this conference in the middle of the crisis. So congrats to you, and thanks again for the opportunity.

Thanks, Dave. And hopefully, we'll catch up soon, maybe in person some time.

That would be nice. All right. Take care. Stay safe.

You too. Thank you. Goodbye.