George LeMaitre - Chairman and Chief Executive Officer Joseph Pellegrino - Chief Financial Officer David Roberts - President.

Chris Lewis - ROTH Capital Partners Jason Wittes - Brean Capital Jan Wald - Benchmark Company Larry Haimovitch - HMTC Drew Ranieri - Stifel, Nicolaus & Company.

Welcome to the LeMaitre Vascular Second Quarter 2015 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would now like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead sir..

Thank you, Jasmine. Good afternoon and thank you for joining us on our Q2 2015 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, July 28, 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.

Any reconciliation of GAAP to non-GAAP measure discussed in this call is contained in the associated press release 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. Q2 2015 was another productive quarter. I'll focus on three headlines. First sales momentum continued as we posted record sales of $19.9 million up 12% organically. Second, we generated record operating profit of $2.8 million up 41%. Third, Valvulotome sales grew 14% in Q2 due to the HYDRO launch.

As for our first headline, Q2 sales increased 12% organically to $19.9 million. This was our third consecutive quarter of record sales and we beat Q1 by $1 million. There were several growth drivers in Q2. By geography the Americas and Europe continued to perform well. Organically the Americas grew 11% while Europe grew 24%.

By product our two largest product lines posted impressive growth. Valvulotome grew 14% and XenoSure grew 24%. Remarkably Q2 was XenoSure's 25th consecutive quarterly sales record. As to our second headline, we generated record operating profits of $2.8 million in Q2 up 41% versus Q2 2014.

Strong sales and restrained operating expenses drove the bottom line. Operating expenses decreased 1%. SG&A expenses were flat and R&D expenses grew 17%. But unlike the year ago there were no special charges in Q2. Our 14% up margin in Q2 is our second best ever. Net income increased 39% to $1.8 million our third-best ever.

EBITDA increased 31% to a record $3.7 million and finally EPS increased 25% to $0.10 a share our second-highest ever. As to our third headline Valvulotome sales grew 14% in Q2 due to the continued success of the HYDRO launch. This product features a hydrophilic coating, a smaller diameter and a higher hospital.

Now nine months into the launch the HYDRO represented 87% of all Valvulotome dollar sales in Q2. We continue to roll out the HYDRO globally with 18 of our 20 direct to hospital countries on board as of July 1. In Q2 we also received regulatory approval for the HYDRO in Brazil.

Beyond these headlines I'd like to provide a brief update on our salesforce and product line additions. We continue to expand the geographically reach of our salesforce in Q2.

On June 1 we went direct in New Zealand replacing our distributor with an Auckland-based salesman and during the quarter we also reached agreement to buy out our Finnish distributor and plan to go direct there on January 1. Worldwide we are targeting 89 to 90 sales reps by year-end. We also continue to expand product lines.

On May 15 we acquired rights to the Tru-Incise valvulotome for sale outside the U.S. LPM sales were approximately $3000. We also completed the first-in-man of our internally developed long AnastoClip two weeks ago and expect the first-in-man of our Smart Shunt [ph] in Q4.

Stepping back for a moment LeMaitre's financial objectives are simple, 10% sales growth and 20% profit growth. We achieve both of these objectives in Q1 and in Q2. I will also note we were added to the Russell 2000 Index in June underscoring our growth and contributing to increased visibility for the stock. I'll now hand the call over to JJ..

Thanks George. We continued to be pleased with our ability to generate operating income. For the last four quarters we have produced operating income of $9.7 million representing an operating margin of 13%. We recorded a gross margin of 66% in Q2 down from 68.1% in Q2 2014.

The decrease was driven by stronger dollar and increased sales of lower margin products specifically Omniflow, angioscope and the HYDRO. We believe however that our gross margin in Q3 and Q4 as cost reduction efforts on our XenoSure manufacturing line take hold. We now expect our gross margin to be 69% in Q3 and 68.5% for the full year 2015.

Of course our entire 2015 P&L is impacted by the strengthening dollar. Approximately 40% of our sales and expenses are transacted in non-dollar currencies. In Q2 2015 we estimated that the strong dollar decreased our revenues by $1.7 million and our operating income was similarly reduced by approximately $800,000.

For the full year 2015 we estimate that the strong dollar will decrease sales by approximately $5.3 million gross margin by 170 basis points and reduce operating income by $2.4 million. Our guidance includes these effects. Cash in Q2 2015 increased $2.4 million to $19.4 million.

Cash from operations was $3.9 million or cash outlays included $1.1 million related to the Tru-Incise acquisition, $700, 000 of dividends and $470,000 of capital expenditures. Looking towards Q3 we recently sold assets related to the [indiscernible] product line which we discontinued a year ago. We netted $360,000 of cash from this transaction.

Turning to guidance in Q3, 2015 expect sales of $18.8 million a reported increase of 7% versus Q3, 2014. Excluding currency effects this represents 15% sales growth and excluding currency effects and acquisitions this represents 10% organic growth.

We also expect Q3 2015 gross margin of 69% and Q3 2015 operating income of $2.2 million and 12% operating margin. For the full year 2015 we have increased our sales guidance to $77.3 million a reported increase of 9% versus 2014.

Excluding currently effects this represents 16% sales growth and excluding currency effects and acquisitions this represents 11% organic sales growth. We also expect a 2015 gross margin of 60.5% and are increasing our 2015 operating income guidance to $9.4 million a 12% operating margin and an increase of 48% from the prior year.

Before opening up the call to Q&A I'd like to welcome Charlie Jones of Dougherty to our list of six covering analysts. In addition, please note we are now holding Analyst Day the morning of Thursday, December 3 in New York City.

And finally, we are pleased to be presenting at a few upcoming conferences including the Investment Conference in Minneapolis on August 5, Canaccord in Boston on August 12, the Ideas Conference in Chicago on August 26, the Barrington Conference in Chicago on September 1, and at Sidoti in New York City on September 2.

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

[Operator Instructions] And our first question comes from the line of Chris Lewis with ROTH Capital Partners. Please proceed..

Hey guys, good afternoon, can you hear me all right?.

Hi Chris, just fine..

Great. Congrats on a strong quarter here and continued sales momentum. First question is just around the guidance. If I back into kind of the fourth quarter outlook it looks like you are implying a bit of a sequential down tick terms of operating margin in the fourth quarter versus the third quarter.

So can you just walk us through that dynamic there and what potential incremental, I guess, operating spend assumptions are embedded within that outlook?.

Yes, thanks Chris. So, I think you see that the implied sales tick up a little bit and then in the Op income it is sort of flat and around the same area in the low twos.

We have said a few things, one is that we're going to get from our current 81 reps to high 80s, 90 reps by year-end, and I think there will be some investment spending there that will increase operating expenses. In addition, we'll be hiring VP of sales over the next period of time and that will increase Op expenses as well.

And there are some other areas around the firm where we've sort of added investment bodies into the mix. And so I think generally what you're seeing is an uptick in op expenses to get you from here to there and hopefully that sets us up properly for a good next year in terms of having the folks to do what we need to do..

And then on the gross margin line can you walk us through what gives you the confidence that that rebounce from here in the second half of this year?.

Most of the answer Chris is in our XenoSure line. So one of the top exes past quarter Q2 was XenoSure inefficiencies, but really the reality is the XenoSure line had started producing XenoSure product at a lower, much lower cost than we've seen historically.

A little bit ago it just does not come through the P&L and we're pretty sure that that's going to come through the P&L in Q3 and Q4 and we're going to see some nice improvement there. It is a substantial number sequentially. So I think that gives us confidence of going from the 66% to the 69%. So that may be one piece.

Also in Q3 may be there is a little less China sales and/or export sales to our geographies where there are lower gross margins, but we'll see how that goes. And then thirdly we have some purchase accounting related to the Omniflow acquisition that has gone away and so that should help the gross margin as well..

I appreciate the color there and just one more from me. Can you give us an update on potentially where you are with an impending relatively close M&A opportunities given your continually strong cash balance? Thanks guys..

Chris it's Dave, thanks for the question. Yes we're so we just finished a small tuck-in acquisition in Q2 which JJ mentioned and of course as usual pipeline, numerous opportunities. I usually say a lot of words but don't say very much at this point.

We have done five acquisitions in the last two to three years, old drop in sort of nichy [ph], but we're out there continuing got look with the same set of criteria and I hope that at some point I'll be able to announce another acquisition and it will do well for the company. But I don’t have any specific news at this time..

Yes, just a follow up real quick, can you just elaborate on the acquisition that was made during the quarter? Thanks..

Sure. So we acquired a very small product line with less than $300,000 in sales. It was called the Tru-Incise device. It is a lower priced Valvulotome that we acquired the rights in Europe to this device. It basically gives another product line for vascular surgeons to use.

Some surgeons just prefer one device over another and this gives us sort of a lower price offering for a bag over there. A big part of this frankly there was a big base of business of this particular device in Finland and that really allowed us to go direct there.

And so that was an employment consideration for us, but even beyond Finland what is important about a client has devices. We picked up a list of customers and we're able to cross sell or other 14 or 15 product lines for those customers. So, sort of out of your mate's playbook although that's one arguably smaller than others..

Thank you..

[Operator Instructions] And our next question comes from the line of Jason Wittes from Brean Capital. Please proceed..

Hi thanks for taking the questions. I wanted to ask about China. I don’t know if you mentioned it in the script, but was there any impact from China this quarter and if not when should we expect greater impact from that region..

Right, so in fact, Jason this is George could I talk to you. There was an impact and there was a negative impact. We sold about $600 in Q2 2014 and we only sold $163,000 in Q2 2015. So yes, China is kind of pulling down this whole number.

Where are we saying this is very lumpy in China and we still are awaiting the approvals sort of two notable approvals around this tridec system you know that we have a five-year, $7.8 million distribution agreement that gets triggered the second we get these approvals and we've kind of been sitting here waiting.

I think our old guidance was hey we'll get them in Q2 it feels like they are getting close and I would say it would be odd if we didn’t get them in Q3 and/or Q4. So that's a big piece of the China play. We also just hired a new general manager in China. I think everyone on our call knows we sort of stubbed our toe.

We hired a general manager and she quit five months later in this January. We've now got a new general manager in her chair in Shanghai. Her name is Ying and she just started in June. So we're sort of restarting the engine over there. Concurrently, we also hired a marketing fellow who sits in that office and a regulatory woman who is up in Beijing.

So we now have three Chinese employees. The revenue is incredibly lumpy over there, but that's sort of where we're at in China, still very excited..

That's helpful, thank you. I wanted to ask about some of the drivers right now in front of how much further do you think they have go? Valvulotome, HYDRO and XenoSure. XenoSure just continues to just plug away.

It seems like for the Valvulotome product there is an ASP bump but and I'm just curious as to just sort of how long we should model growth on both those products?.

I think in your question you've kind of got the answer right already so I'll just repeat what we feel which is the HYDRO is a finite type of thing. I think in the old days pre HYDRO we were doing price hikes in the order of around 6 or 7 or 8% annually. You could expect that to continue on starting in December of this year.

But this switch to the HYDRO we do feel like we've done a pretty good job taking advantage of a major advancement device but effectively it's been to our shareholder it looks like just an enormous price hike. And we did have 24% organic growth for the HYDRO in H1 and also in both Q1 and Q2.

So if you strip out the euro collapsing over these two quarters it was an extraordinary price hike. But to continue on your question it feels like since it's been a rolling heart switch Jason and not just done one time discreetly, it feels like you still have two or three more quarters of enjoyment there.

It is not going to necessarily stop one day because these other items are rolling over. I think Tokyo won't be fully converted till January 1, France won't be till January 1. So you still have a couple things going on even into 2016. But you are right, that's a discrete thing and maybe at the six quarters and maybe we're three quarter way through it.

As it relates to XenoSure, some nice things have gone on this quarter it sort of bounced up a little bit. If you strip out the currency effects the XenoSure grew 34% organically in Q2 and why is that, well simply in Europe it continues to just set the world on fire. I think organic growth was 48% in Europe.

I'm getting a nod here Dave what you got, you don’t have anything other than that. Okay so let's say 48% we'll come back to that, it's either that or 38% Europe and then also in the U.S. We've had a nice thing happen which is the main competitor which is Baxter biosurgery. It used to be Synovis.

They've sort of stumbled on a packaging change which then led them into some backorders. So we've planned a little bit of a bomb for XenoSure in the Americas that we weren’t exactly expecting. And so the short answer to that as it continues to just move along here and it's all good right now..

Okay great, thank you very much. I'll jump back in queue..

Thanks Jason..

And our next question comes from the line of Jan Wald from Benchmark Company. Please proceed..

Good morning or good afternoon everyone. Great quarter.

I guess just some clarification on the sales reps and distribution of the sales reps and how you see them coming on board and starting to be productive as they come, how do you see the rest of this year and going into next year in terms of them?.

Jan, this is George. Thanks for your question. It feels to me like we are right on plan with the European group and it feels like there are about seven folks coming in, six or seven folks coming in in all these big cities we've talked about before.

The summer obviously slows down, so you won't see as much hiring activity in August over there as you would in the U.S. So, I feel like you are going to see a little bit of this in the Q3 expenses and then you are going to see the full brunt of it in the Q4 expenses as JJ was referring to previously. In the U.S.

it feels like you are going to see a bunch of hires maybe one a month for the next five months. So we are saying 89 to 90, but you could considerably see us going up even a little bit higher than that. But end of year we're really excited about getting them on board so that they can hopefully impact 2016.

We always have these annual sales meetings in January and we bring all the reps to these sales meetings and it is nice to sort of have a larger team at those sales meetings. We seem to get a lot out of them.

So there is a little bit of as you run up to those sales meetings there is a little bit of a crunch to get the reps on to the payroll right before the sales meeting. And the sales meeting is January 03, this year..

I guess you know, just in terms of the surgery market versus the endovascular market, do you see any changes out there that would affect your business?.

I mean the constant question about LeMaitre is always endovascular right, but we see the same endovascular things going on. It does seem as though we've seen some charts recently indicate that the excessive growth of endovascular slowing down and it's a little bit more on asymptotic [ph] words what's sort of the flat of the open surgery businesses.

So it seems like those things the switch is slowing down a little bit, but there's plenty of endovascular business here. I am going to pass it over to Dave here he has a couple of cents to add to this Jan..

Yes, Jan, good question. I would just add that on let's say five or 10 years ago vascular surgeons didn’t all necessarily know how to perform endovascular procedures. And so there was a big are big training component for endovascular and today I would say the vascular surgeons know how to perform endovascular procedures.

So, and all vascular surgeons virtually are performing endovascular procedures. So in a funny way the distinction is broken down a little bit because endovascular is just another type of procedure that vascular surgeons are performing.

There's no big training barrier that's incumbent upon a medical device company to show surgeons how to use a stent graft or a standard abdomen atherectomy device or something like that. So I think that makes the endovascular segment of our market more accessible to a company like LeMaitre..

So with that it kind of goes to my next question about this, do you see, what you do is really knowing the vascular surgeons very well and finding out what they want to do and supporting them in terms of their product needs.

Do you, are you seeing different product needs that will put I guess, put you in a different place in terms of what you are looking for in terms of acquisitions?.

I mean to your point I would say the bulk of the products in LeMaitre Vascular's bag currently are using open vascular surgery. But because all vascular surgeons know how to do endovascular procedures I would say we are open for business looking at products in endovascular surgery as well.

You know some products that are more interventional in nature maybe used more by an interventional cardiologist or perhaps an interventional radiologist.

So we will be may be at the margin is more interested in with the made in the margin more interested in one that would be used by our vascular surgeon, but some were looking at both open and endovascular procedures. I think the key for us is markets where there's a little bit less rivalry where we feel like we could have a winning hand..

An Jan to add on to this a little bit for some color, it does feel like what's going on over in Europe for us does show me and there has been a renaissance in the U.S. as well. The 24% organic growth in Europe those are numbers that any endovascular company would die to have right now.

So the business plan of LeMaitre has been, hey there is a lot of fun left in open vascular surgery and I think what keeps happening over in Europe I don’t know what the facts running around was last 15 quarters we've done double-digits over in Europe or something like that.

But I think that does show you that there's still a lot of excitement and market growth available for a of them double digits over in Europe or something like that but I think I think that does show you the distill a lot of excitement and market growth available for a company like LeMaitre in open vascular surgery.

And as Dave mentioned our portfolio is largely open vascular, but it is growing 24% organically in Q2 and I think in Q1 if I have the numbers right it was something like 18% or so in Europe as well. And then of course in the U.S. we've had this balance were we've got 11% for Q1 and 12% for Q2. So there is something going on.

It is really good with these open vascular products, but we agree endovascular is exciting as well..

Thank you very much..

Thanks Jan..

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

Congratulations on another great quarter guys..

Thank you Larry..

You know there have been so many good questions asked, I've enjoyed all of them and you have given good answers, so I'm just going to say congrats and sign off. Thank you..

Thanks Larry, a man of few words. I appreciate it..

Not often, not often..

And our next question comes from the line of Rick Wise with Stifel, Nicolaus. Please proceed..

Hi guys, this is Drew Ranieri for Rick.

Just a couple of quick questions, the first is really we always ask you about acquisition and you mentioned during the divesture are there other opportunities to prune your portfolio and maybe what are your criteria for divestitures?.

Sure, Drew, this is Dave. Thank you for the question.

Sure, you know our product bag has about 15 or 16 product lines in it and there are several that you hear us talk about regularly that are always driving revenue at the company like the Valvulotome, like XenoSure and then other products catheters, or an AnastoClip, that sort of at different times powering the growth of the company.

There are some product lines that we don’t talk about very much and in a funny way I would say the divestiture criteria is sort of the opposite of the acquisition criteria.

So if a product line is small, if it is growing, if it's off call point, if it absorbs a lot of rep time but does not provide a lot of return for that, those are all factors that get weighed in if there is not a lot of cross-selling between that device and others in the bag. So there are criteria.

We have a process we've set up where we are managing our portfolio proactively and I would say we will look at other divestitures over time and you may see that here and there of course. For products just sitting in the bag and is generating cash flow and profit then we may leave it there.

But we certainly are, will and are considering other divestitures, but we have to be prudent about it of course..

All right thank you and sorry if I missed this earlier in the call, but your sales force number is you are still expecting to get 89 or 90 by year end, maybe a little bit higher, but you mentioned before maybe a couple calls ago, worldwide capacity could be 125, 150 reps, somewhere in that range.

But maybe how should we think about salesforce strength over the next two to three years would be similar to 2015 or should we see an acceleration and maybe what geographic areas you would be expanding into. Thanks..

Good question, thanks a lot. I feel as though we've been adding sort of 5 or six for a long time every year and maybe we could think of it that way or although we don’t like to guidance into 2016 on anything and so I'd say I hesitate to guide into 2016, but that's been our past activity.

In terms of other countries it feels to me as though we have a lot of filling in to do in China.

So we just got into Finland and New Zealand this past quarter and I would say China is probably going to absorb a lot of our energy over the next year or two so maybe not so many new countries but again I don't want to guide into 2016 and I always find when I try to guide far ahead I get myself wrong.

So we don't know, but I would say China is a good place to put bodies going forward..

Thanks just wanted to try..

Thank you..

There are no remaining questions at this time. Ladies and gentlemen that concludes today's conference. I would like to thank you for your participation. You may now disconnect. You all have a great day..