JJ Pellegrino - CFO George LeMaitre – Chairman and CEO Dave Roberts - President.

Drew Ranieri - Stifel Joe Munda - Sidoti & Company Chris Lewis - ROTH Capital Partners Jan Wald - Benchmark Company Larry Haimovitch - HMTC.

Welcome to the LeMaitre Vascular Q4 2014 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. Please go ahead sir..

Thank you, Whitney. Good afternoon and thank you for joining us on our Q4 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 make 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, February 25, 2015, 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 Web site, www.lemaitre.com.

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

Thanks, JJ. Q4 2014 was a very productive quarter. I'll focus on three headlines. First off, Q4 was a record quarter up and down the income statement; secondly, our recently launched HYDRO Valvulotome is performing quite well, and finally, our newly acquired Omniflow II biologic graft is performing beyond our expectations.

As to our first headline, in Q4 we posted several financial records. Record sales of $18.7 million up 4% versus Q4 2013, record EBITDA of $3.6 million up 85%, record op income of $2.7 million up 134%, record operating margin of 15%. Also net income in the quarter was $1.9 million up 157% and earnings were $0.11 per diluted share up 120%.

As to our second headline, the 1.5 millimeter HYDRO Valvulotome features hydrophilic coating in a smaller diameter. Our sales force is rallied around the HYDRO launch and vascular surgeons have roundly praised the new device. As part of our country-by-country hard switch launch in November the HYDRO became the only LeMaitre Valvulotome in the U.S.

– available in the U.S. Australia and Canada converted to the HYDRO in Q3 2014 and Europe is slated for conversion throughout 2015. So HYDRO represented 54% of all Valvulotome dollar sales in Q4, indeed the launch perked up the entire Valvulotome category, which grew 7.4% on a constant currency basis in Q4.

In February 2015, the Valvulotome ASP in the Americas was 16% higher than in February 2014. The HYDRO hard switch is similar to a Gillette razor upgrade, the customer pays a premium for a noticeably improved shave. We currently have 50% to 60% market share in Valvulotomes and we believe the HYDRO launch should increase our share.

As to our third headline, we acquired the Omniflow II biologic graft in August 2014 and spent the last four months of 2014 buying out dealers and converting to a direct to hospital channel. On our October 28, earnings call we projected $3 million of Omniflow II sales in 2015.

So we were pleased to see a Q4 2014 annualized sales run rate of $3.6 million of the Omniflow II product. We acquired Omniflow II biologic graft for three reasons; number one, biologic grafts are associated with less infection than standard synthetic grafts. Number two, biologic grafts are a $30 million niche market with limited competition.

And finally number three, LeMaitre's 31 sales reps in Europe are a superior channel than the previous patch work of independent distributors. At the acquisition's 6 month anniversary, our European sales force is more enthusiastic about Omniflow II than we had expected.

Stepping back for a moment, our often stated financial objectives are fairly straight-forward, 10% annual reported sales growth and 20% annual op income growth. For the full year 2014, we posted 10% sales growth and 40% op income growth.

And at LeMaitre, op income growth feeds acquisitions and dividends, you've seen us execute four acquisitions in the last 18 months and recently the Board approved our fourth straight annual $0.005 per share dividend increase. Q1 2015 dividends will be $0.04 per share, a 2.1% yield. I'll now hand the call over to JJ..

Thanks, George. From a bottom-line perspective, Q4 was an excellent finish to the year. As you may recall, we posted a small operating loss in Q1 2014, executed significant cost cutting in Q1 and Q2 and over the subsequent quarters reported operating income of $2 million, $1.9 million and $2.7 million.

These results represented operating margins of 11%, 11% and 15% respectively and were driven by increased sales as well as lower operating expenses. Indeed Q4 operating expenses totaled $10.1 million, a full $700,000 less than the year earlier period. Our gross margin story in 2014 was less dramatic and we exited the year at 68.7% in Q4.

With no new large scale integrations or disruptive product additions over the last three quarters of the year, our gross margin hovered consistently around 68.5%.

As of late gross margin has been characterized by several offsetting or transient items and going forward I expect the gross margin to remain in the 68.5% range and increased marginally to 69% by Q4 2015. Any analysis of sales, gross margin or operating income, however, must be viewed through the prism of recent foreign exchange swings.

As you may know about 60% of our sales are transacted in U.S. dollars. In Q4 2014, we estimated that the strong dollar decreased our revenues by $670,000 and our operating income by $330,000.

Looking towards full year 2015, we estimate that the strong dollar will decrease sales by approximately $3.7 million, reduce gross margin by 100 basis points and reduce operating income by approximately $1.8 million. Turning to guidance, we expect Q1 2015 sales of $17.8 million, a reported increase of 6% versus Q1 2014.

Excluding the effects of changes in foreign currency exchange rates this represents 12% of sales growth. Excluding currency effects and acquisitions in other words organically this represents 7% sales growth. We also expect Q1 2015 operating income of $1.4 million, an 8% operating margin.

For the full year 2015, we expect sales of $74.5 million, reported increase of 5% versus 2014. Excluding the effects of changes in foreign currency exchange rates this represents 10% sales growth. Excluding currency effects and acquisitions in other words organically this represents 6% sales growth.

We also expect full year 2015 operating income to increase by 19% to $7.5 million representing a 10% operating margin. With that, I will turn it back over to the operator for Q&A..

[Operator Instructions] Our first question comes from the line of Jason Wittes with Brean Capital. Please proceed..

Jason, are you out there? It sounds like Jason is not getting to us maybe he is on mute. To the operator, this is George, maybe we move to the next questioner and see if that person also has the same problem. Sorry about that Jason, if you can hear us..

And your next question comes from the line of Rick Wise with Stifel. Please proceed..

Hi, guys, it’s Drew Ranieri in for Rick.

How are you guys doing?.

Great.

How are you doing?.

Doing well. Just a couple of questions. So you mentioned earlier that Omniflow was at an annualized run rate of about $3.6 million and last quarter you provided Omniflow and Angioscope guidance of about $3.5 million total for 2015. Can you – is there any upside with Angioscope not being included in this new figure or is….

Yes. I mean I think there is. It's all baked into guidance for 2015, you have to know that, we thought a lot about what the full guidance for revenues was going to be for 2015, so that's already in there.

But, if you want to split it out mentally, yes, you are looking at least in Q4, the annualized run rate was $3.6 million for Omniflow and you could think of the Angioscope is unchanged from what we talked about before.

I think just because Q4 annualized at $3.6 million, I don't know necessarily if we are seeing it's different in 2015, but one could fall through on that line of logic, as you were just saying..

Okay.

And then just another question about FX, you break out obviously the U.S., Germany and Japan and other countries and other country is about 30% of your revenue, but is there anyway to get a little bit more granular as to what currencies are baked into that portion of your overall mix?.

Okay. So on the press release in the back, you can see a schedule of sales by geography, and we don't break things out any more granular than that. But, you know that we are selling in those geographies from discussions with us historically in the U.K.

and Australia maybe a little Norway, and so there are some other sort of currencies that run in and out of there in and above what you see on that grid. But really the euro sort of is the main piece for you..

Yes. I think, we were talking about it at the Board meeting last week, and the euro was about 90% of the topic here because the euro has moved so violently, Canadian dollars a little bit in there as well and then the Swiss franc obviously is going in the opposite direction of those two.

But, our Swiss business is only around $1 million a year, so it's not that germane..

Okay.

And then if I can just sneak in one last question, do you have what your sales force was per region?.

We certainly do. And so right now as it is constituted, we are telling you we have 81 reps on the payroll, 41 in the Americas of which 4 are Canadian and the balance are American 37; 31 in Europe, 9 in Asia/Pac Rim for a total again of 81..

All right, great. Thanks guys. I will get back in queue..

Thanks..

Your next question comes from the line of Joe Munda of Sidoti & Company. Please proceed..

Good afternoon, George and JJ. Thanks for taking the question..

Joe, how are you?.

Joe, how are you?.

Good. George, in your prepared remarks, you talked about HYDRO Valvulotome being 54% of all Valvulotome sales in the quarter.

Can you give us some sense of what total Valvulotome sales were?.

I think we were talking in those terms last time. So I will continue on that; usually we try not to break it out. I think that total sales dollars for the year Joe, I know that's what exactly what you asked was about $16.5 million including allocated shipping. And you can assume that the last quarter was the fourth of that.

I don't have better data right at my finger tips unless anyone else in this call does, J, you got that? So I say a fourth of that call it $4 million; $4.1 million..

23% of sales in Q4..

Yes. That's a better fact. 23% of sales exactly in Q4 Joe and the sales were what, 18.7..

Okay.

I guess that takes into my next question, I mean the new introduction you are talking about here and in Europe, is that where the growth is really the driver going into 2015, how should we look at it, I know you talked about Omniflow here, but is the new Valvulotome really going to be point of emphasis for growth going forward?.

It's a big one in 2015. I think we have been pretty good about not advertising. This is not really a unit growth category for us. We are assuming flat maybe up a little bit unit wise. But, pricing wise, yes, I mean we are thrilled to get that 16% pricing number in February in the Americas.

Largely speaking the hard switch is all done in Australia, Canada, the U.S. and now Europe is all about this year. You can sort of think one or two countries a month for 12 months. And then Japan at the end of the year. So yes, and to answer your question, yes, big growth driver, of course XenoSure, we expect to continue to be a large growth driver.

And then also Omniflow, we talked about that. We know that we booked exactly $1 million of revenue in Omniflow in 2014 and we just were talking through what is the guidance for 2015 maybe it's 35 as the previous gentlemen was discussing. So maybe that growth is $2.5 from 2014 to 2015 for Omniflow and then you got XenoSure and the Valvulotome.

Those are the big guys for growth..

Okay. That's helpful. Thank you. George as far as the sales force is concerned, it seems like you lost four reps in the quarter, any plans to replace them and where was it, was it in the U.S.

or was it abroad?.

Sure. We didn't – during the quarter at the last call, we also had 81 Joe. But, your broader point is correct, which is when we came to talk to you guys in April, we had 87 reps on the payroll. And now we have 81 at this juncture. So seven are down and it's actually four of them come out of Europe, one out of the Pac RIM and one out of the Americas.

And then finally, answer to your question, yes, we do plan to replace them. We are sort of talking about 89, 90 reps by the end of the year. And we feel like the organic growth can get scooched up, we had a 6% organic growth for 2014 and we feel like we can do a little bit better with a little bit of rep growth..

Okay. Okay. That's helpful. I got two for more JJ here. JJ, R&D seems to be kind of trickling down here quarter-over-quarter here.

Is this a new level we should be looking at going forward?.

I would say Joe, first of all, you are correct. We sort of been in the 6.3 range in the last couple of quarters, now we are in the 5.8 range. And I would say that going forward we want to see that go higher, I think we want to invest a little bit more in R&D and we’ll probably work do that over the coming year.

You can see us sort of a year ago in the high 7s range, 8% range and so we probably try and work to get at least partially back there as the year goes on..

Okay. And then I guess my final question as far as gross margins are concerned, you’re confident in the gross margins being in the 68.5% range and picking up by the fourth quarter.

What are you seeing as far as driving that? Is it the price increases, efficiencies, what kind of margin improvement, where is it coming from?.

Yes. So there is a lot of sort of offset in gross margin going back and forth, some of the higher level once are with the [B&I] [ph] acquisition there was inventory write-up for purchase price accounting that's going to go away. So we're going to have some accounting help there.

I think also on the XenoSure manufacturing line we're going to see some improvement there as we drive XenoSure cost down and that will flow through the gross margin as the year goes on. And certainly since Q4 from 2014 to 2015 through the year, we'll have ASP increases that will help as well.

And so I think those are the good guys going through gross margin Joe and then some of the offsets might be mix and certainly FX..

Okay. Thank you..

Thanks Joe..

[Operator Instructions] Your next question comes from the line of Chris Lewis with ROTH Capital Partners. Please proceed..

Hey, guys, good afternoon. Thanks for taking the questions..

Hey Chris..

First just on – for 2015, can you provide some color on how we should think about the revenue cadence per quarter in order to get to that guidance level, should we expect a similar, I guess quarter-to-quarter kind of revenue progression similar to the past couple of years or is there some different items we should think about for this year?.

Okay. Sure, yes. Chris I would say, as you look at the last couple of years do remember that at the very end of Q3 in both 2013 and 2014 we bought sort of sizeable companies, which then artificially if you will pumped up Q4 revenues.

So just keep that in mind, but in general, the pattern for us as we look at revenues is quite clear, which is Q1 is always a light quarter and Q3 is always a light quarter, Q2 is really good and then Q4 winds up being a record if you will inside of those four quarters.

So Q2 and Q4 are the biggies and then because we're such a European business in Q3, it's light in the summer and Q1, I think you're recovering from the end of the year with the sales reps are all rallying to get to their numbers..

And for the 5% reported revenue growth outlook for the year, how does that breakout between North America and international?.

Interesting, we didn't break that out as we were – as we've given you this number. So we don't have a break down. We have budgets. I would say you can feel pretty confident that our international business is running really well right now.

And so I would say at a very high level, the lion share of that growth is coming out of international, in particular Europe just continues to excel even our expectations. So I would say it's an European number with the U.S. kind of bringing it down a bit..

Okay, great.

And then for XenoSure, can you provide an update on where the company is in terms of the manufacturing transition and I guess the room was there for that to impact gross margins going forward?.

Yes. I would say we obviously have completed the "transition" and gained some good stability a number of quarters back in XenoSure manufacturing and now it's about squeezing cost out of that room and I think that's already started and it started as part of the cost cutting efforts last year and it will continue through this year.

So I'm going to say if you think about it sort of in a little bit of a linear fashion throughout this year and then maybe it starts tailing off in the subsequent years. But I think you're going to get some decent traction this year..

Great. And then if I could sneak one more and M&A anything new or new developments you kind of share on that front? Thanks for the time..

Thanks Chris. So I think, Chris, its Dave. I would say, we've been – I've been busy restocking the pipeline since the couple of deals in Q3 and obviously we have been focused a lot around here in integration. We have good number of targets, the criteria has not changed.

In general, I would say they are a little bit larger than what we've looked at in the past. So just doing what we do, waiting for our pitch and trying to find the right target to swing at..

I appreciate it. Thanks guys..

Your next question comes from the line of Jan Wald with Benchmark Company. Please proceed..

Hi. Guys, congratulations on the quarter.

Most of my questions have actually been asked, but maybe talk about in terms of how you see that developing over the year, you obviously have lost, you are going to add, [indiscernible] to 90, most of those adds going to be in Europe, because you're lost more there or is that something that you want to do, because you see a real opportunity there and then you might put more than just [quarter] [ph] back there?.

Right. Jan your question, this is George, your question, your voice cut out right at the mid of your question, I think your asking about us redoing the sales force back up to 90, I'm going to answer it like that. So the great thing, the exciting thing about LeMaitre right now is that we have access to so many countries.

So we get to really look at what are the best cities to go into. And so for us, you're going to see places we think this year like Shanghai, like Beijing, like Auckland, a couple in Europe, I can name Rotterdam and Stuttgart and then I was filling in the U.S. with four or five.

So it will sprinkle around the world, I think the bigger opportunities are kind of Asia/Pac Rim and then filling in Europe, because we had so many great products over there that have all the approvals over there. And then in the U.S.

we don't quite have as many devices, because it's a little bit more difficult to get some of these products approved in the U.S. So sprinkling all around the world getting up to 90, I hope that answers your question..

It actually did, so you didn't need the middle part. I guess my last question is, is sort of related to what the – the person asked before me in terms of acquisitions.

And I guess are you happy with your organic growth that your getting, you feel the need to be allowed and acquired, you never I think really see going after something just to go after it.

But is there something that you want to do that you feel like you need to do, or can you be patient and be happy with where you're going without an acquisition this year or maybe even next year?.

Well, that's a great question Jan, I hadn't really thought about that way. But, I do think we do want to stay to this goal, hey we're going to try to grow revenue for you 10%. And I do feel like the organic numbers for the last – if you put the last six years together, it kind of come out like 7%.

So I do think the management team does feel some kick in the behind we need to buy stuff, we need to step up distribution relationships with this. I think we've been pretty selective and judicious, I think you're saying that in your question, I don't think we'll do anything dumb.

But I do feel, some pressure to go out and deploy the capital, we have $18 million of cash in the balance sheet, we expect we're not really guiding on cash, but we expect to be fairly cash flow positive here. And so it's got to go somewhere, it's going into dividends and acquisitions.

So we do feel like we're an acquisitive company and we take pride in that and we want to keep pushing on that. I hope that answers my question.

Dave you got a different angle on that or?.

I would just add that acquisition certainly give us size and critical mass and give us leverage. And the way this business model works is we get bigger, we add more reps, more infrastructure and we get stronger.

And so yes, acquisitions it's been a fundamental part of the business plan for 17 years, it will continue to be, but as everybody knows who watches LeMaitre we're deliberate, we're never desperate, we're somewhat price sensitive, we wait for our pitch. But if we see the right target we will execute on it..

Jan, I hope that gets to your question from two angles..

It does. Thank you very much.

And one last one, if – would you ever give up dividends for acquisition?.

That's interesting, I'm going to say, I don't have to deal with that topic right now, because its not in front of me, but that's an interesting topic Jan, I can't answer that it seems so hypothetical out there.

Right now I do think as we try to transmit to Wall Street what our capital allocation strategy is, I think we're aggressively pursuing acquisitions and dividends..

Okay. Thank you very much..

Your next question comes from the line of Larry Haimovitch with HMTC. Please proceed..

Good afternoon, gentlemen, congrats on the progress the whole year. You had record operating margins of 15%, I'm wondering what you think those operating margins will be as you grow the business, let's say take the business on a $100 million.

Is it reasonable to think that the operating margin should be better than that as you spread your fixed cost over a bigger revenue base?.

So Larry, it's George. Thanks for the great question. Terrific question. I do noticed that you are cherry picking off my best op margin of the history of time with 15% and then you are going from there and I appreciate that. I would say just to tamper this all and we sort of saw this coming three quarters ago.

We do still feel like the year was a 9% op-margin year and our guidance is telling you that we are 10% next year. Definitely you can hear through Dave's comments about acquisitions. We feel strongly that if we can get bigger, we can really start pulling operating leverage out of this business.

And I think for the first time since we have been doing this, remember we had three straight years of $4 million in op income. And we finally broken out of that to the 6.3 number. And so we are starting to show op leverage and I think you are right on when we get bigger, we feel like we can do better than a 10%.

But, I hesitate to guide up to what we can get to. We do know from this year in Q2 a 11%, Q3 a 11% and Q4 15%. We do know that these numbers are possible at LeMaitre although I think you can hear in some of these questions about sales reps and R&D.

We probably need to tweak in a little bit more investment into the sales force and R&D which might take you down a little bit from 2015. I hope that gets a part of your question.

Maybe J can take it more from a CFO perspective?.

Yes. So Larry, if you think of us a sort of 8%, 9% 10% op margin company because that's sort of annually where we have been as opposed to 15% of the last quarter.

And then you think as we grow where we are going to get leverage, you can probably go to selling and marketing as we fill out existing geographies and cover fixed costs in those existing geographies and maybe you can get a few points there or a couple of points.

And then G&A, you don't need another CFO or CEO, and you are going to get some points there. And R&D as George said probably not we want to continue to investment spend there. And then maybe even get a little bit of gross margin as time goes on.

So you can probably challenge those up and think that maybe there is some blue sky out there potentially and we are certainly not guiding on that as you get larger in scale you can get some better sort of percent or lower percent of sales numbers in those areas..

Yes. That's great. Good answers.

Just a follow-up, I think what you are both saying here is, yes, as our sales base grows our operating income profit margin should trend upward, is that a good takeaway message from what you both have said?.

Absolutely. And as Dave was getting at, it's driving our desire to have a larger company which pushes us to do acquisitions because of what you are after which is op margin and leverage..

Yes. Okay, great. Thanks very much..

Thanks Larry..

[Operator Instructions] Your next question comes from the line of [indiscernible]. Please proceed..

So I had a couple of questions on XenoSure, the first one being, can you give us a sense of what the gross margin impact of your cost initiatives would be for that product specifically? And then also – are you planning on bring that product into the Asian markets and if so, when could we expect that to materialize?.

Yes. So the XenoSure piece we haven't really quantified for you I would say, improvements are baked into guidance. So as you get from sort of the 68.5% to 69% over the course of the year that's the piece of it. You may get some decent improvement in the product line itself. But remember it's some fraction of the total sales pie.

So it's not going to be the driver of gross margin improvement. But, it will have a marginal impact. Sorry, I didn't answer your question directly..

As it relates to Asia, we have filed in Australia, feels like it's about 12 months, 18 months away. We filed in China, it feels it's about 24 months away and this isn't quite Asia but Russia we just filed. And then specifically on Japan, which is probably what you are getting at as well.

We still not committed to what is almost certainly a three year-ish clinical trial with $1 million or so in expenses. So we are still sorting out what we should do in Japan, but certainly China and Australia were chasing down..

Great.

If I can just follow-up with one more, it's been certainly impressive that pricing power you have demonstrated in your markets, I'm kind of curious, are you seeing any other opportunities in some of your other product categories for taking price increases, that might be able to get up to that 10% organic growth – top-line growth number that you are trying to reach?.

So just – I hate to micro manage that question but we are talking about 10% reported revenue growth not organic growth. But I know you still have the question about other places where we want to get growth through pricing. And yes, we do – so we didn't talk much about our pipeline of new products today.

But we do – we got a first in man for what we call the long AnastoClip and that's happening in Q2.

And we think we are going to do first in man for our Shunt flow monitor project and I would say on that second project that's a $10 million category for LeMaitre and it's largely an American product line where price flexibility is the highest at the hospital level.

And so I think to your question, I think what you are seeing us try to do with the Valvulotome make a big change and they can get a price hike back for that. I think you are going to see us try to do on another one of our – I will call it mega categories which is the Shunt business.

When that thing gets rolling, my guess is, you don't see any impact – material impact from that project until 2016 and maybe even into 2017. But, yes, we are going after that and it's our third or fourth largest product line..

Okay. Thanks guys. Congrats on a great quarter..

Thank you..

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