JJ Pellegrino - Chief Financial Officer George LeMaitre - Chairman and CEO Dave Roberts - President.

Jason Mills - Canaccord Rick Wise - Stifel Jason Wittes - Brean Capital Chris Lewis - ROTH Capital Partners Joe Munda - Sidoti & Company Larry Haimovitch - HMTC Jan Wald - The Benchmark Company.

Welcome to the LeMaitre Vascular Q3 2014 Financial Results Conference Call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead sir..

Thank you, Steve. Good afternoon and thank you for joining us on our Q3 2014 conference call. Joining 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 be making some forward-looking statements, 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, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today, October 28, 2014, and should not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the cautionary statement regarding forward-looking information and the Risk Factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that could cause results to differ materially from those expressed or implied.

During this call, we will discuss non-GAAP financial measures, which include organic sales and growth numbers, as well as EBITDA. A reconciliation of GAAP to non-GAAP measures is contained in our press release announcing the quarter’s results and is available in the Investor Relations section of our website, www.lemaitre.com.

I’ll now turn the call over to George LeMaitre..

Thanks JJ. Q3 2014 was a very productive quarter. Dave will handle the discussion on the two acquisitions and I'll focus on our four operational headlines.

First headline, in Q3 sales grew 14% to $17.5 million; second headline, we accelerated the launch of the new HYDRO LeMaitre Valvulotome in the quarter; thirdly, we opened our Shanghai branch giving us eight sales offices worldwide; and finally, in Q3 operating income grew 139% to $1.9 million.

As to our first headline, we posted $17.5 million in Q3 sales, 14% reported growth and 12% organic growth. Valvulotomes, XenoSure, Shunt and Trivex drove growth in Q3. Valvulotomes benefited from the HYDRO launch and XenoSure was up 26%.

XenoSure was approved in the U.S., Europe, Canada and New Zealand and we've made regulatory submissions in Australia and Brazil. In Q3, our shunts continue to benefit from the 2013 clinical instruments acquisition as we extinguish supply to a key European competitor. Also in the U.S. a different shunt competitor went into and extended back order.

As for Trivex, we posted $2.9 million in sales in the first 12 months of ownership and the device has helped push us into China. As to our second headline. The 1.5 millimeter HYDRO is the most ambitious redesign of our flagship product in 12 years. The new product features hydrophilic coating and a smaller diameter.

Valvulotomes grew 15% in Q3 2014, accounted for 23% of sales and were our number one growth product. Our 81 rep sales force has rallied around the HYDRO launch and vascular surgeons have roundly praised the device. In July, the HYDRO became are only Valvulotome available in Australia.

In September, we executed the same hard switch in Canada and in November all U.S. households will be transitioned. We’re expecting $100 to $200 per unit price hike from HYDRO upgrade. In some respect, this transition is similar to a direct raise or upgrade. The customer pays a premium for a noticeably improved [shave].

However, unlike to that, we plan to make the previous generation device unavailable. We currently have a 50% to 60% market share in Valvulotomes and we believe this launch should result in share gains. As to our third headline, during Q3, we hired a general manager in China and opened our Shanghai branch.

This office will support our Trivex and AnastoClip distributors and we’ll pursue regulatory approval. Sales in China should be approximately $1.1 million in 2014. By 2016, we expect five additional approvals in China. Shanghai is LeMaitre’s 8th office, we also have sales operations in Burlington, Frankfurt, Tokyo, Toronto, Milan, Madrid and Melbourne.

Our Q3 sales growth was led by several international subsidiaries. Australia, New Zealand was up 159%, Switzerland 40%, Canada 30%, Italy 29%, the UK 28% and Iberia 21%. Our globalization helps to diversify our revenue stream and allows us to enter virgin markets, many of which grow faster than the U.S.

As to our fourth and final headline, our profits of $1.9 million were up 139% in Q3 due to strong summer sales and 2014 cost cutting. We also posted EBITDA of 2.7 million, a 79% increase over Q3 2013. We remain focused on profit and cash flow and we’ve been able to keep a lid on hiring.

Despite the addition of 10 new employees from the Australian acquisition, headcount at September 30 2014 was down from a year ago. For the full year 2014, we expect to record 10% sales growth and 26% op income growth. This is in line with our often stated objectives, 10% sales growth and 20% op income growth. I'll now hand the call over to Dave..

Thanks George. As you may have seen in our press release, in August we acquired Bio Nova manufacturer of the Omniflow II biological graft for peripheral bypass and dialysis access. In its fiscal year ended June 30 2014, Bio Nova broke even on $2.3 million of sales, 90% of which were in Europe. We expect $3 million of Omniflow II sales in 2015.

We acquired Omniflow II biologic graft for three reasons. First biological grafts are associated with less infection than standard [acron] or PTFE grafts. Second, this is a niche $30 million market with limited competition. Finally we have a better sales channel.

Compared to Bio Nova's 10 European independent distributors, we made 31 European sales reps or more vascular centric and should drive sales growth. From an integration perspective, we've already transitioned 9 of these 10 distributors. As of November 1st, we'll be selling Omniflow II direct to hospital in all of the Europe except for Holland.

The cost of these transitions was approximately $900,000 in line with our pre-acquisition expectations. Integration of the factory in Melbourne is proceeding at pace and we've already cut $500,000 in annualized expenses. Turning to valuation, we paid $7.8 million for the business or 3.4 times sales.

Excluding Bio Nova’s $1.9 million building included in the transaction, we paid 2.6 times sales. In addition, we believe that we acquired approximately $5.6 million of NOLs. In Q3 we also acquired an angioscope. Angioscopes are fiber optic catheters often used for visualization during in situ bypass with a valvulotome.

LTM sales pre-acquisition were $350,000 and total consideration was $420,000 or 1.2 times sales. In 2015, we will transfer production to Burlington and we expect $500,000 in angioscope sales. Before turning it over to JJ, it’s worth pointing out that LeMaitre Vascular has completed four acquisitions in the last 14 months.

Three of these deals broaden our product offerings, while one increase market share in our core categories. As these four integrations progress, we’ll begin to shift our focus to the next acquisition..

Thanks Dave. I’d now like to say a few words about our gross margin, operating profitability, taxes and guidance. After reporting a gross margin of 66.7% in Q4 2013, we’ve made good progress repairing that part of our business.

We successfully integrated XenoSure and Clinical Instruments manufacturing into Burlington and have pushed XenoSure margins from 40% to 60% with more improvement still to come. Sequentially the Q3 2014 gross margin increased 50 basis points from Q2 2014 driven by manufacturing efficiencies and reduced inventory write-offs.

Through the recent acquisitions and product launches, we believe our Q4 2014 gross margin is likely to remain in the 68% range. Q3 2014 operating income of $1.9 million and 11% operating margin was a significant improvement year-over-year. Operating expenses declined from $11.5 million in Q1, 2014 to $10.4 million in Q2 to $10.2 million in Q3.

We are pleased that our first half cost cutting efforts paved the way for these expenses declines. Effective tax rate in Q3 2014 was 51%. We expect this to drop to 40% this quarter. These elevated rates are driven by a tax entity reorganization which should enable us to capture $5.6 million of NOLs in the Bio Nova deal.

This represents $1.7 million in potential tax savings. Turning to guidance, we expect Q4, 2014 record sales of $18.9 million, up 5% versus the year earlier period and record operating income of $2.1 million, up 80%. This implies the Q4 2014 op margin of 11%.

We are also increasing our 2014 full year sales guidance to $71.3 million, up 10% and increasing full year 2014 op income guidance to $5.7 million, up 26%. Included in the $18.9 million Q4 2014 guidance is $500,000 of revenue from the two recent acquisitions.

Separately, we will be a presenting at several upcoming investor conferences, The Stifel Healthcare Conference in November, in New York; the Canaccord Medical Technology Forum in November in New York, the Brean BMC Life Sciences Summit in November, in New York; the Benchmark Micro Discovery Conference in December in Chicago and the BTIG Meditech Healthcare Conference in February in Snowbird, Utah.

With that, I'll turn it back over to Steve for Q&A..

Thank you. (Operator Instructions). It comes from the line of Jason Mills with Canaccord. Please go ahead..

Thanks for taking the question. Congrats on another great quarter, George..

Thanks Jason..

First question as far as for maybe JJ. You mentioned gross margins have been picking up sequentially for the past three quarters and there is more to come with XenoSure, the price hike on the Valvulotome, HYDRO Valvulotome should help us well.

I’m wondering if you could give us sort of some broader guidance as we look forward on the gross margin line..

Yes, I’m thinking about 68% in Q4 Jason, and you know the new acquisitions come with lower gross margins and maybe 50% and 20%ish for Omniflow and angioscope respectively. So those are going to push down on margins a bit.

As well as the new HYDRO comes with higher ASP and therefore higher gross profits, but it’s actually more expensive to manufacture right now. So the gross margin is a bit worse than the current margin for valvulotomes.

We’re going to fix that overtime for sure, but in the short-term, I think there is a gross margin negative even though there is a gross profit good guide coming on that score..

And on FX of course sequentially going from Q3 to Q4, we’re quite nervous about strong dollar Jason..

That makes sense. So, it’s hard to tell on latter point George where FX is going to flow through 2015, you’re not ready at this point, I understand to give 2015 guidance.

But as some of the things start to get better for you on the product side, maybe catches up where you think geographical mix will be next year and sort of generally speaking if we should see let's say a 68% of your gross margin in ‘14, what kind of expansion should we hold that path as we move forward?.

Yes. So, this one is a little tougher, obviously we're not giving guidance for next year, but some of the factors are in play. Certainly our mix in particular, mix to China. And so China is a pretty exciting new territory for us. You can get some big orders pretty quickly and they come in at a chunky fashion.

If you recall in Q4, we had a pretty strong China sales quarter, sales were nice overall worldwide for the quarter. Q1 was a little lighter and then Q2 was strong again and you felt this coming through the sales line and the gross margin line as well. Generally speaking sales to China do come at a bit lower gross margin. So I'd say, that's one impact.

The other piece would be the U.S. mix generally. We had a nice 9% quarter in the U.S. on this quarter to the extent that we keep that up and the mix doesn't run away from us in terms of being less U.S. and more European. That's going to help the margin as well.

And then Jason we sell to what we call factory direct countries sort of export countries outside of the Europe; Turkey, to the world and Romania so that type of thing. Those come in chunky as well sort of like China and to the extent that you get some of those in the quarter, they're going to help.

But overall I guess what I'm saying is for the immediate term. I'm sort of in the 68% range bound on place and then we'll see how those other factors play out over the course of next year. One other I guess important piece that runs through the gross margin line would be XenoSure.

And I told you in my script that we get that margin up to about 60% needs to be in sort of the 40s range. So that's a really nice improvement. I bet we'll continue to improve that overtime as we get more units into that part of the factory and we continue to rip out cost there as well..

Fantastic. One more follow-up and I'll get back in queue. Came into the quarter sort of those $76 million, $77 million range just having to model 2015 without guidance, which would have implied somewhere in the range of high single-digit growth.

I hesitate taking the acquisitions, which I’ve not factored into my model, $3.5 million you’re giving guidance to in this press release and just adding to that.

So, I guess the question is having given guidance on some of the new acquisitions what sort of organic growth ranges you would have us sort of think about before you give formal guidance so that we won’t get ahead of you for next year?.

Right. So, and obviously, Jason, you know why we gave you those the only 2015 numbers and the whole thing of about the two acquisitions because we know there is such a wildcard for people and there is sort of range boundable by us at 3.5.

But answer to your question in the script I talked several times about this concept that the company is trying to grow about 10% and that’s on a reported basis, so maybe you’re taking the delta away from those acquisitions and filling that in the organic.

But again, no 2015 guidance here at all, but we’re trying to grow the company about 10% a year and we’re trying to grow op income about 20% year. We really haven’t gotten down to the brass tacks of the 2015 year and as you may not have either and I know you’re just looking for the direction..

Yes, that’s right. That’s helpful though. And then just a housekeeping, tax rate obviously higher this quarter, but you bought some NOLs.

Just wondering on the reported basis what you would have us model going forward?.

Yes. I know it was an odd quarter. We did some things to try and capture those NOLs in Australia going forward and that affected this current quarter. I’m going to say in the low 40s, Jason as you think about it for the next couple of quarters.

And then as the Australian entities become profitable we should be able to utilize those NOLs and we should get sort of a more normalized and/or lower rate sort of after that..

Thanks guys..

Thanks Jason..

Thank you. And your next question comes from the line of Rick Wise from Stifel. Please go ahead..

Hi Rick.

I think you are on right now?.

Yes.

Can you hear me clearly now?.

Clearly..

Great. Couple of questions, again congrats on the quarter as well. Just on the Valvulotome side, I heard you correctly I think maybe not $500 to $600. So, if we think about that, if I'm calculating correctly 20%, 30% premium.

Is that the right way to think about it and assuming no share gain that line alone should grow pretty significantly maybe 20% to 30% over the next 12 months.

Is that the right way?.

Yes Rick, I apologize I'm not sure we got that $500 number in the script, I did quote a number that was a $100 to $200..

Okay..

And to fill in more sort of where you’re going with this, we sell 18,000 units a year..

Okay. That's great. Turning to a more general question, number of the companies we've talked to this quarter have said publicly that in general they think procedure volumes are stable to slightly improving a little more optimistic. Any general thoughts just as we think about the quarter and maybe the year ahead.

Are you feeling any better generally about the kind of procedure volumes you are seeing out there?.

Rick, I can't say sort of only inside my building, I can say I felt though the GDP issue in Q1 versus the GDP issue in Q3 in the U.S. particularly is what I'm talking about right now was much better and you could feel a little bit of that in our domestic sales results.

So yes, I would say we felt that particularly if you look back against Q1 particularly, Q1 was a particularly strange quarter and sort of unexpected down thing for us; I think Q3 was an unwinding of that.

In Japan specifically, which is our fourth largest geography, the consumption tax going from 5% to 8% has been a major blow in our opinion to what’s going on in Japanese hospitals. So what had been for a long time a very fruitful market for us for the last two quarters has just basically been flat..

Yes. And turning to your comments on acquisitions, I think you said, if I heard you correctly, as the current acquisitions progress and integration is completing, completed, you’ll focus on the next.

Should I -- am I over reading into it, if I hear you saying -- am I hear you saying, you’re going to hold off for a while or is that again not the right way to think about it?.

Well Rick, this is Dave. Thanks for the question.

We look, we do look at it from a bandwidth perspective and the moment you close an acquisition usually there are some follow-up integration items; of course the whole organization gets involved in integration but terms of the deal team, there are always purchase price adjustments, distributor terminations and these types of other ancillary transactions.

So that does absorb bandwidth for a little while. But of course LeMaitre and you know us and we’re always out there looking. So I don’t want you to over read into it, but it is to say that there is a little bit of sort of mop-up transactional work following the acquisition..

Okay. And just lastly for me, I just wanted to follow-up on the guidance a little bit. How many weeks of the acquisitions were in the third quarter? And I assume you're going to have a full fourth quarter from everything and that's the right way to think about it when we’re modeling..

Right. So the acquisition of Omniflow was done almost exactly half way through the third quarter. So we got half a quarter of that. And then the angioscope acquisition which is much smaller $350,000 in LTM sales that was completed around September 15. So we only got two weeks of that.

So you do get a full fourth quarter for both of those product lines in terms of the guidance..

Got you. Thanks so much..

Thanks Rick..

Thank you. And your next question comes from the line of Jason Wittes of Brean Capital. Please go ahead..

Hi thanks.

Hi guys, how are you today?.

Hey Jason..

Hey. So, wanted to ask on Hydro valvulotome. It sounds like you guys are increasing more confidence on the price increase that put you put forth. As I recall last quarter you mentioned $100, now you're saying $100 to $200 and now you're also adding that you anticipate this will gain market share.

Am I reading this correctly in terms of the market share gains; I mean what is the outlook for that?.

I think we spent the last three months since we talked to you last Jason watching Australia flip over and then watching Canada flip over. And we're getting nothing but thumbs up from our sales reps, we're doing this right now. Australia we got a $400 of unit price. I don't think that's going to carry around the world.

At least I don’t like get all out on that just yet. And in Canada I think we had a $200 price hike something like. The doctors love the device, and the reps like the price hike and the change in what we call a hard switch. So yes, we've gained some confidence in the last three months about this device.

In terms of market share, I think we keep thinking logically this thing is smaller; it's much more slippery; it gets into veins; more of nocks than the old valvulotome was. It wasn’t quite a small as one of our competitors the [Uracil] in United States but we have 55% market share here.

So you don’t want to get too out ahead of yourself getting market share gains but it does stand the reason that the best valvulotome company in the world that just come out of the major redesign of its product and has an 81-person sales force, it does stand the reason we’re going to gain market share with this.

So, it seems, it’ll be odd if I couldn’t come up and say that..

Okay. That’s encouraging. And it sounds like the pricing is just not an issue even in the U.S. market given the….

I am pretty sure that pricing is not an issue at all in Australia; it’s a tiny issue in Canada and it’s not an issue in United States market.

I will say in Europe and Japan, I think the answer is to be seen and as we sort of hopscotch around Europe and Japan next year, hard switching those markets, we’re going to be doing a little bit of assessing out exactly how they field our pricing before we really finally turn the screw. So U.S.

Australia, Canada, you’re right; I think in Europe and Japan where in this particular instance 10,000 of our 18,000 units are overseas. And so the big unit volume is overseas, not exactly in the U.S. in Australia and Canada..

Okay, very helpful.

On pricing, can you kind of give us some indication on how pricing was outside of Hydro valvulotome for the rest of your products, did you see an uptick in pricing as well this quarter?.

Sure. So you see an organic growth rate of 12% there and we are loosely dividing that three quarters units and one quarter pricing, so you can think about a 3%, a fourth of that 12% was pricing..

Okay, great. And then….

That doesn’t split out for Hydro that’s everything and we don’t have…..

That’s everything including hydro in there, okay. .

That’s right and by the way the Hydro is so far is only Australia and Canada and so you can almost think it hasn’t really started. I think about 10% of the units have flipped over to HYDRO by now..

Okay. That's helpful. Last question, I know you mentioned big expansion in China with your Shanghai office. You mentioned, I think that over the next three years you expect five -- I think if I heard correctly, five products approvals.

Do you have any kind of -- how should we think about the [direct] in China right now, I know it’s really asked, but have a question?.

And did you say direct in China by any chance?.

I'd say kind of it..

Okay. So, China is a little different for us and that's why I’d want to draw that distinction which is we're going to continue to use our dealers for a very long time, I don't really, I think even the Medtronic is not direct. And so it would be weird for us to be direct for very, very long time there.

We actually are approaching this, I don't have any preconceive notions about what's going to happen next year or the year after in China. I think the point for us is where they are finally. And we open up the office in August and was sort of in, let's put resources into it and see where it goes mode.

And I think it's pretty mature for us to try to carve it out and predict what it's going to be. When I talk about maybe a 10% 2015 growth number for sales, I think China is all baked into that non-guidance if you will, Jason. So, it's already in there and we'll see where it goes.

I bet in year three out there we'll start getting a great idea of where to go with this..

Okay, great. I'll jump back in queue. Thanks a lot guys..

Thanks..

Thank you. And your next question comes from the line of Chris Lewis from ROTH Capital Partners. Please go ahead..

Hey guys, good afternoon. Congrats on the strong quarter..

Chris, thank you..

First question is just around the fourth quarter guide, you obviously raise the revenue guidance I think by a under a $1 million and lowered the operating income guidance by nearly about $0.5 million.

So, I’m trying to understand kind of the discrepancy there, sounds like the gross margin number of 68% is a little bit below previous expectations, I think we’re around 70% and maybe a little bit of higher tax rate.

Is there anything else impacting the difference there perhaps in OpEx line items or other factors to consider?.

Yes. So, you got the first one, which is gross margin we were saying before it was going to be in the 70% range with the addition of the two acquisitions and the HYDRO rollout we’re now sort of in the 68% range, so certainly a delta there. And then Bio Nova comes with its own sort of operating expenses, G&A mostly.

And so we’re going to fill that flow through in Q4 as well. And I would say generally the 10.2 that you saw in Q3 probably kicks up a little bit for the rest of the business if you will. So, a little bit of tick up there and then the addition of the Bio Nova and then the gross margin piece as well. And do you think it’s also work, I know you saw this.

But you’re talking about our implied Q4 guidance. I do think it’s worth recognizing that the guidance for the company went up for the year from 5.6 at the last phone call to 5.7 here, if I’m getting the numbers right, there is 5.7,5.8..

I think 5.6..

5.6 to 5.7. So it is worth. I agree with you that the implied guidance for the company went down for Q4 specifically, but for the year we kept it and went up a little bit..

Yes, absolutely. And then just in terms of kind of the growth outlook. So, you talked about the 10% reported kind of non-guidance, guidance if you will for 2015 top-line growth.

If I just look at kind of the implied revenue contributions from that recent acquisition, it’s kind of net $2 million to $2.5 million in 2015 that gives you about 3% to 4% growth. And then you just did 12% organic growth this quarter.

So, I'm just trying to figure out in terms of the reported number for 2015 why shouldn't that come in kind of closer to the low double-digit to mid-teens versus the 10% you talked about?.

Yes. I think Chris, the [devil] might be in the detail too for your calculation. I think watching the FX rate is really, really important at this company given that only 53% of our revenues or 57% of our revenues come from the U.S. proper. And so the dollars has been exceptionally strong recently.

And when we think about what's going to happen next year, we’re not currency traders. And so we just pick what the dollar exchange rate is right this second when we think about next year. So I think if you do all the details and do all of the math, you'll come out with a significantly higher organic growth to go the numbers we're talking about..

Got you. That makes sense. And then in terms of operating margin really strong there in the quarter. So congrats on that and fourth quarter I think implies relatively consistent kind of in that 11% range.

And (inaudible) talk about, but just in 2015, is there any reason why you can't sustain that type of level or at least kind of in the double-digit ballpark if you will?.

I mean again on the 2015 guidance we've already gone way beyond what we want to do. I saw that we put something out there for you guys and we do feel comfortable saying we'll try to grow this thing 10% on the top-line and 20% of the bottom-line.

I don't know if that number comes out into 11s and 12s for you, Chris, doesn't seem like it does based on my mathematics. But definitely we feel great about what we did this year in terms of turnaround and we'll see where it goes from there. February 28th, we'll give you guys full guidance on what we think is going to happen.

So much is going to happen in the next five months that we just -- we always find that we’re wrong predicting the future particularly if the future doesn’t start for five months..

I will say Chris, you can see the last two quarters worth about $2 million of op income and those 11% op margin. So I feel like we’re in a good place for next year but this is a trade-off. We’re going to go through the budgeting process and decide what to invest in growth and then R&D.

And so that bottom-line piece isn’t just a function of getting as much leverage as you’re possibly can to the bottom-line at the expense of growth for example. So, if we’ve been in that sort of 7%, 8%, 9% range and op margin range and now we’re in the sort of 10% or 11% range, we’re probably at the high-end of that discussion..

Okay, great. And then 81, I think you mentioned you had 81 sales reps, can you give us a sense of the company’s plans or expectations for that to potentially expand over the next couple of quarters? Thanks a lot. .

Sure, thanks Chris. So, I would go out to the end of this year, I feel like we’re thinking about adding a couple, maybe getting to 83, 84, 85 depending on, you never really at the end of the year in control of who equips and who doesn’t equip, but it seems like will open up a few more allocations..

Great, thank you..

Thanks..

And your next question comes from the line of Joe Munda from Sidoti & Company. Please go ahead..

Good afternoon guys. Thanks for taking the questions..

Hi Joe..

George my first question on the Shanghai office, I think I read a press release while back where you’d talked about seven products possibly being introduced in China by 2016 and then in your prepared remarks today you’re talking five products.

Can you give us some color there, I mean are there issues that could be pasteurizing?.

Joe, I think the answer is better than that which is I think you might have just sort of read some of the words around a little differently. We already have two approvals and the new words in the transcript for simplicity are we plan to get five more approvals. I didn't add them together to get seven..

I'm sorry, that's my fault. As far as valvulotomes, I think missed the sales growth in the quarter. Was it 15% is that….

That's right..

Now, the HYDRO introduction, what could it do to that 15%, are you see -- are we expecting an acceleration on that 15% or is that 15% that we saw in the quarter is the number to work off of?.

So, this is interesting. I'm going to say, we really try not to guide down into the specific products. But I think the math by 2016, you could think about 18,000 units carrying another $150 on each one of those.

And this is not all going to happen at once, like I said a lot of the stuff is over in Europe; and Japan we’re a little bit more sketchy about the price hike. So, call it 150 times 18,000 units, that's a $2.7 million add, but it's not going to happen immediately and we don't know how fast it will add. It is baked into our guidance for Q4.

It's already in there, what we think is going to happen..

What kind of gross margin does the valvulotome, the HYDRO currently has?.

Right. Okay, so we also don't do that on these things for proprietary reasons, we're a little nervous about letting our competitors know what our margins are. But it's very high right now and it will go down a little bit, it does cost us about a $100 extra to make this thing right now, as JJ was alluding to. And so we'll work on that $100.

But from now you are going to see a degraded gross margin even though you are going to see improved gross profit dollars..

Okay. And then I guess my final question. JJ, can you walk us through the tax rate again? I'm sorry, I got little confused here, you are talking -- it was 51% this year, you are talking possibly in the 40s next quarter or next couple of quarters.

Can you talk about or give us a little bit more color on what exactly is driving that?.

Yes. So, for the year, it may wind up being sort of in the mid low-40s. For the quarter, it was 51% and for Q4 I’m saying sort of 40, low-40s in that range. And the topic here is the Bio Nova acquisition and with that acquisition there were about $6 million of NOLs. And in order to try and capture those, we revoked our U.S. tax group.

And so in the process of doing that, the effective tax rate went up. And so that’s really what drove it, this sort of move to get these NOLs later. So that as we get profitable in Australia, we should be using those NOLs and having really nice low tax rates. And that I believe through to the corporate tax rate later on.

So, we’ll probably see that into through end of next year and that kind of thing. But in the short-term, you have to go through a little pain to get there..

Okay. And one -- I’m sorry one other question.

JJ, rough estimate CapEx for the first nine months?.

CapEx for the first nine months, we just saw this recently and I feel like it was around a million bucks. So little lighter, we put a little of break on it, Joe, inside all these cost cuts in 2014..

Okay. Thanks guys..

And your next question from line of Larry Haimovitch from HMTC. Please go ahead..

Good afternoon gentlemen. Congrats on the progress. And all my smart analyst friends have asked some great questions. The only question I had at this point is for George. George happily you’ve been consistently under estimating the growth of the (inaudible) product, I’m just having….

XenoSure. .

Thank you. Can you talk a little bit more about it, I mean obviously it's a very pleasant surprise, obviously it's proved to be a genius acquisition that you made a couple of year ago to bring it fully.

And talk a little bit more about some of the factors that are driving it because it's becoming a very strong and very positive force in the company's growth?.

Sure Larry. And I tell you we did take some lessons out of this and applied it to that biological graft that we bought down in Australia this summer. So, generally speaking doctors are figuring out that biologics work better in infected fields than what I'll call [inert] grafts, which is (inaudible).

And so luckily and again Dave is the guy who did this acquisition. He was definitely the lead in charge here. Luckily we bought that thing. We didn't know what we got four years ago. We now know what we have, we're excited about it.

And they're switching and we happen to be one the of the two -- it's sort of a duopoly although there is other competitors appearing on the landscape now and we happen to be one of the two selling it. We also happen to have a more vascular surgeon centric sales force than Senova, which is owned by Baxter our competitor.

So we've got a great sales force. We're in a happy time right now which is doctors are switching from inert to biologics. And we've taken that and we've said, well if it works for our patch, why not try it for a tubular graft. And we're all going to see if that works out too. I don't think we want to get people's excitement out there.

It's much about the tube grafts. It's been out there for a while, hasn't shown growth rates like this. But it's sort of the association that we're making at the show booth, the patch and the tube look identical even though one is made out of one substance and one is made of another substance..

And Larry this is Dave. I would just pile on to what George said. Obviously he mentioned this is a niche market and the competition is somewhat limited and our sales channel is perfect for it. But on top of that biological patch, every vascular surgeon knows how to fill in a patch. So, the learning curve the training time is very limited.

It suited very well to our [Tier A] sales rep. And generally speaking also these are not on contract, so we don’t run into contract there is a sales impediment on the way to closing each sale. Anyway there was a nice fit for the company..

And George do you think the markets now better than you originally targeted, as I recall you had a modest market size when you threw out the number a conference call or two ago.

Do you have a better estimate or a bigger estimate now what the market might be?.

Larry, this is Dave. If you don’t mind I’ll take that. Yes, I think originally we said the market size was $30 million to $40 million. I think we’ve inched it up a little bit to maybe $45 million. So, we think we’re going to have 22% share this year.

But I would still say it’s a niche market and that’s again one of the reasons that we succeed in this space..

We’re only in Western Europe and North America essentially with this right now, Larry, so we’re trying get into Australia, we’re trying to get into Brazil and we’re just about to file for China too. Japan looks really hard to get an approval, so we haven’t gone through the paper work yet. It seems to be a clinical trial.

But we’re trying to take our sort of Western market success and apply it to our new pack room and international globalization..

And all of those new countries you mentioned, George it sounds like there is some regulatory considerations in every case?.

Unfortunately there is a lot around biological, Larry. It’s a whole different level of regulatory. So it’s a little bit slower. Generally as a 510(k) company we get our approvals in 90 days to a year at the outside and in this thing you’re talking cycles of more like six months to two and half years..

Yes. And then one more question on XenoSure.

JJ, I think you said gross margins were now up to about 60%?.

Yes..

Do you think that the gross margins as it continues to grow and as you get better manufacturing could actually exceed the current corporate average?.

I guess there is a chance. I mean, I still see a lot of cost cutting that we can pull out of that line and then we're going to leverage our fixed cost over more units. So, I don't want to give you any guidance on that, but I do feel like there is still substantial upside there..

Great. Alright. Thanks very much guys..

Thanks Larry..

And your next question comes from the line of Jan Wald from Benchmark Company. Please go ahead..

Good afternoon everyone. Congratulations on the quarter. Most of my questions have been asked and answered. But what I’d like to do maybe is just maybe take a pretty good step back and talk about the facts that you -- it seems like there has been a little bit of an improvement on the U.S. side of things in terms of procedures or at least maybe volume.

And also Europe seems to be something that you are growing very nicely. How do you see those two markets playing out over the next year or two? And how are you going to allocate resources in order to maximize your opportunity in both..

Well, that's a great question. And we have despite the good quarter in the U.S. we have sort of send down a little bit, sales reps are down by 10% from a year ago. So they have been doing this with sort of one of their hands tied behind their back. We’ve put a lot of resources into Europe and Asia over the year. If I can answer U.S.

versus OUS, Jan, maybe that's an easier one for me. I think that the company will continue to grow above company growth rates outside of the U.S. because I think we've been so aggressive putting these sales offices in these places like Australia and Tokyo and Frankfurt and Shanghai and Toronto et cetera.

So, I think we’re in real virgin markets out there, we’re nowhere. If you go to Australia they don’t know what LeMaitre Vascular is, they’re just learning. So, I think you can’t help, but do better outside of the United States. And I think our allocation of sales reps may reflect that. We’re sort of -- we’ve been in the U.S.

for 30 years and we’ve got 40 reps here. We haven’t been in China ever, they don’t know who we are. And so I feel like there is a lot of growth there that can happen. And so we’re constantly coping each of these potential territories against each other in terms of what could it be, how much is the cost for the territory.

I think for now, we’ve got enough infrastructure for a while. I don’t think you’re going to see us go to Brazil next year and sort of further get out there. I think you’re going to see us filling with the sales reps in places like Shanghai and Beijing and some other Chinese cities, as well as maybe Australia and maybe some Europe.

And also there are places in the U.S. that are begging for reps. So, there is no shortage of places to put reps for us. We always say maybe the world needs 150 LeMaitre Vascular reps or a 125 and right now we have 81. So, there is no shortage of places. Probably I’d lean a little bit more towards OUS rather than U.S..

Okay. And one last question just in terms of the market itself, there seems to be a push from the interventional side of things to make minimally invasive devices and approach the surgeries that way. And since at least from what we’ve been hearing some of the vascular surgeons are actually moving in that direction.

How do you see your business growing or moving maybe in the next year to two years?.

Yes. I agree, Jan. There is no doubt that the world is trying to get minimally invasive. When we say open vascular that's sort of a stylization of what we do. I would say about 85% is open vascular and about 15% is endovascular. As we do acquisitions, of course we're always trying to get more minimally invasive endovascular.

If the business stayed the same though, as part of your question without the acquisitions and the development that we plan, the business stays the same. We're still quite excited about the opportunity in open vascular.

The business plan here to a certain extent is that our competitors are leaving that market, people like Boston Scientific, people like Edwards. And we're there to fill in for them.

In addition, when you go to Australia and Japan and China these markets are so big of course they're still going to be doing open vascular surgery and we have a 0% share there right now. We expect to have a 10% or 15% share as the time goes by in those markets. So I think you approach it both those ways. But I agree, there is no question.

Vascular surgeons are on board. They're getting better [catheter] skills. They want to do more interventional type procedures..

Thank you very much..

Thank you..

Thank you. Gentlemen, there are no further questions. I would like to conclude today's conference. We thank you for your participation. You may now disconnect. And have a great day..