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

Drew Ranieri - Stifel Chris Lewis - ROTH Capital Partners Jeff Chu - Canaccord Genuity Mike Petusky - Barrington Research Jan Wald - Benchmark Company Larry Haimovitch - HMTC.

Welcome to the LeMaitre Vascular Third Quarter 2015 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, Jasmine. Good afternoon and thank you for joining us on our Q3 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, October 27, 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.

A 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. Q3 2015 was another strong quarter. I'll focus on three headlines. First we generated record operating profit of $3.3 million up 79%. Second sales grew 12% organically to $19 million and third, our biologic products continue to drive growth principally XenoSure.

As for our first headline, we generated record operating profit of $3.3 million in Q3 up 79% versus Q3 2014. We also generated record net income of $2.1 million, up 124% versus Q3 of last year. Strong sales and a 71% gross margin drove the bottom line. As for our second headline, Q3 sales increased 12% organically to $19 million.

This was a record summer quarter for LeMaitre. By geography sales in the Americas grew 7% while international sales grew 11%. Q3 2014 was our 12th consecutive quarter of double-digit sales growth in Europe. Our goal is to have 89 to 90 sales reps on the payroll by yearend. As for our third headline, sales of our biologics continue to drive growth.

Our XenoSure patch grew 35% in the quarter and this was its 26th consecutive record quarter. In addition sales of our Omniflow 2 Graft are running at approximately $4 million a year above pre-acquisition levels. In terms of new products, our long AnastoClip is almost finished with its beta trials and should launch in Q4 or Q1.

Pruitt is much -- looks set for its first demand in Q1 or Q2 of 2016. At a high level, LeMaitre's financial objectives are simple, 10% sales growth and 20% profit growth. I'll now hand the call over to JJ..

Thanks George. We recorded a gross margin of 71% in Q3 up from 58.6% in Q3 2014. The 240 basis point increase was driven largely by reducing the share manufacturing cost. Indeed our cost to manufacturers of XenoSure patch has decreased by approximately 30% from one year ago. We expect our Q4 2015 to be 68.5% and full year 2015 gross margin to be 68.7%.

Cash in Q3 2015 increased $4.2 million to $23.6 million. The change in cash included cash from operations of approximately $4.1 million, less capital expenditures of approximately $750,000, acquisition outlays of $875,000 and dividends of $715,000.

Notably the Q3 2015 cash increase was also driven by $2.4 million in cash from stock option exercises as our share price continued to improve. Q3 2015 total operating expenses were flat versus the prior year, adjusting for the $360,000 gain from the divestiture, operating expenses were up 4% to $10.6 million.

This 4% increase was driven by investments in both our sales force and R&D. Our Q3 2015 effective tax rate was 33% down markedly from the prior year period. The decrease was largely driven by our increased 2015 profit forecast as well as the tax benefit from recent stock option exercises.

Separately, our fully diluted share count has increased to 18.5 million shares as our higher stock price has resulted in more employee option exercises and more in the money options. Turning to guidance, in Q4 2015, we expect sales of $20.1 million a reported increase of 8% versus Q4 2014.

Excluding currency effects and acquisitions, this represents 12% organic sales growth. We also expect Q4 2015 gross margin of 28.5% and Q4 2015 operating income of $2.6 million, a 13% operating margin.

For the full year 2015, we've increased our sales guidance to $78 million, a reported increase of 10% versus 2014, excluding currency effects and acquisitions this represents 13% organic sales growth.

We also expect the 2015 gross margin of 68.7% and are increasing our 2015 operating income guidance to $11 million, a 14% operating margin and an increase of 73% over the prior year. Before operating the call up to Q&A, I want to first welcome our newest covering analyst Mike Petusky of Barrington Research.

I would also like to know we're holding an Analyst Day the morning of Thursday, December 3, in New York City. Please RSVP the best curve for IR@lemaitre.com and we'll hold a seat for you. With that, I'll turn it back over to the operator for Q&A..

[Operator Instructions] And our first question comes from the line of Rick Wise with Stifel. Please proceed..

Hi, guys this is Drew Ranieri in for Rick. Congratulations on the great quarter, but just to start biologic grafts and patches continue to be great growth products for you.

I am just kind of thinking about just the large awards of the cash that you have on the balance sheet right now, just absent M&A, can we maybe consider bringing Omniflow to the U.S. is that an option of is your cash primarily focused still on acquisitions..

Sure Drew. Thanks a lot. Of course cash on the balance sheet can be used off the income statement for acquisitions as you mentioned, but it can also be used on an income statement for things like clinical trials. That a decision we haven't made yet on Omniflow and/or any other kind of biologic graft.

Roughly speaking that’s a four-year $4 million investment to bring either some kind of Bovine carotid artery or the Omniflow to the U.S..

Okay, and then you're at 81 reps, excuse me, you ended with 82 sales reps in the quarter and you're considering getting up to 89 or 90 by yearend.

So are you on tract to meeting that goal or is that going to be pushed into 2016? Just wondering what your candidate pool is like both domestically and internationally?.

Sure, that’s a great question actually. We've been talking about ramping up all year and we haven’t really made too much traction here. Yeah, I do feel like it’s doable to 89 to 90. I will say it's been a little bit harder this year than expected. A little bit more turnover we're experiencing at the company than what we had in years past.

It was 6% or 7% for the whole company in 2014 and it's about 12% or 13% in 2015 and so a little bit more turnover that means a little bit more placements of reps. Yes, we think we'll get there and we do have some fantastic cities into which these reps will be going.

Notably I know you didn't ask this, but notably in Beijing we have our first Chinese sales rep starting November 1..

Okay. And then just lastly with the Trivex contract that occurred in the quarter, can you just give us some details about the contract, how that kind of breaks down over the five-year period.

Is there any upside to the contract? And also for future product approvals in China, this is the same distributor that you would be going with?.

Okay. So great. So that contract as we talked about a lot five years $7.8 million it got triggered at the date of the approval to re-approval of the Trivex box and that got reapproved as you saw in a separate press release about a week and a half ago or so.

It breaks down as such in year one after the re-approval, you get about 1.3 in revenue, year two 1.4 etcetera, etcetera up to about 1.8 in the final year all balancing out to 7.8. I don’t know if there is a upside to that. I haven't found over the years these contracts are not exactly what to expect.

So maybe we'll get a little upside maybe we'll get a little downside, but it feels like a good projection range that we can all rally around. As far as the approvals go, so we have told people we probably have six approvals by the end of 2016 that’s our bogie and so we're still chasing on that. We've three of them right now.

We've Trivex box, Trivex disposable and an AnastoClip and we're looking forward shortly to tape and shunt lumen catheters and then later on the occlusion catheters.

The Valvulotome in XenoSure we're now realizing will require a small clinical trial and so I would say those things seem to carry two-year horizons rather than we were thinking one year up until six months ago or so or three months or so ago..

Great. Thanks for the detail. I'll hop in back in queue. Thanks..

Thanks a lot Drew..

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

Hey, guys good afternoon.

Can you hear me alright?.

We can Chris..

Great, congrats on the strong quarter, wanted to start on gross margins had a really nice strong quarter here. Was hoping you could provide a bit more color on what drove the upside on the gross margin line and a follow-up to that fourth quarter implies a down-tike in gross margins.

So how should we think about that as we look at the fourth quarter guidance?.

Yeah, thanks Chris. So in the third quarter we got some really nice XenoSure efficiencies. I think as you heard me say in the words beforehand, XenoSure year-over-year cost us down about 30%. So we've really gotten some nice progress there in terms of reducing the XenoSure cost.

And as well in AlboGraft and lifespan we’ve got some good efficiencies coming through. Some of these come and go and a lot of them -- some pieces of Xeno and a lot of the Albo and lifespan is going to come and go, but some of that Xeno is really heard to stay.

And so there is a couple currents going on in the gross margin on that score, but by and large good news all around with those three product lines in Q3. Year-over-year ASPs probably 1.5% to 1.8% good guide in the margin and then there were some headwinds mix U.S. versus U.S.

and some other items, but all of that sort of rolled up to a 2.5% or so improvement year-over-year. But then looking into Q4 Chris, there is a few things going on.

One is we’re doing the transfer of the angioscope line to Burlington, which we acquired a few quarters ago if you recall and then George was just taking about sales to China that will coming through in Q4.

Those generally have lower gross margins and so the gross margin will be negatively impacted by that while the sales line positively impacted and there are some other export sales we might get as well in Q4 we think that will hurt the margin.

And then some of those temporary good guys that we got in Q3 for AlboGraft and lifespan we won’t get in Q4 and so that’s why I’m thinking it was a nice 71% in Q3, but in Q4 I expect it come down a little bit, more in line with where we've been if you look at the overall trend over the last number of quarters and couple of years, we've been improving the margin fairly steadily.

When you look at it more granularly quarter-to-quarter it gets a little choppy, but I think the overall trend is in the right direction..

Understand, appreciate the color there and then moving to the operating margin line guidance implies 14%. This year you’ve done a really nice job of demonstrating leverage.

I know its early to provide guidance for next year but just -- when we look at our models and kind of the assumptions in there what type of leverage opportunities should we think about and expect as we look in '16 for continued operating margin expansion?.

Hey Chris, this is George and I think you've already gotten this, but we’re really hesitant to go too much further with the guidance beyond what we’ve giving you here.

I will say though recently the three of us Dave, JJ and I have started giving this intermediate term guidance of 10% sales growth and 20% operating income growth and I would say in there is the kernel of the leverage that we’re trying to get for us and for you guys..

Perfect and does that 10% sales growth imply any acquisitions?.

People ask how do you break that down. Roughly speaking it’s 8% organic growth and 2% added acquisition growth. That's sort of more looking at what has been the last 10 years or so, but roughly it does, it's not the organic number we are quoting it.

What we think will show up at the end of the year, we did a 10% reported growth if you believe our guidance for Q4, in 2015 we'll show up with a 10% reported growth although this year was little better than normal, it was 13% organic sales growth..

Understood and just one more from me, any details on kind of what we can expect for the Analyst Day next month, thanks a lot..

Yes Chris, Dave Roberts. Thanks for the question. So it is the morning of December 3 and it will of course have the key members of the Management Team from the U.S. and Europe. But in particular we have two vascular surgeons who have agreed to present for us.

One of them is going to talk about the future of open versus endovascular surgery and the other one is going to talk about the future of biologics because obviously biologics are becoming a more important part of the story. So half day event ending with lunch. So we'll get everything right after lunch time, should be a good morning..

Great, I look forward to. Thanks..

Thank you..

And our next question comes from the line of Jason Wittes with Brean Capital. Please proceed..

Hi good afternoon, this is [Evan Lang] [ph] in for Jason. Thanks for taking the question.

I just wanted to ask for 2016 what are some new products to look for and what do you think will drive growth in 2016 and beyond?.

Okay, great. So if I heard you correctly, what are the new products in 2016 and the stuff that we're talking about on this call would be the long AnastoClip which is used for dural closure in the spine. And then also the smart shunt which is the shunt that has a blood flow monitor on it and that’s what we've been talking about.

In terms of generally speaking what will drive future growth? That’s a good question to that I heard. This rep surge if you will going from 80 to 90 is a big piece of our 2016 growth expectations. I will say that XenoSure product just continues to gallop right along.

While the reported growth was 35% in Q3 and it was our 26 consecutive record quarter, the news is actually better than that because organically to strip out the currency impact the product line grew 45% in Q3. So that’s a big piece of what we’re doing around here and of course Omniflow is new in our bag and we’re seeing how that works.

In general the biologics are doing great around here and so I'll tell you more the same next year..

All right thank you..

Thanks Evan..

And our next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed..

Hi, good afternoon. This is actually Jeff Chu in for Jason, can you hear me okay..

Hi, Jeff just fine..

Hi, great George just a quick follow-up to the last question, regarding the rep search how long does it take for a rep to get up to speed typically..

Right so we’re going to -- we’ve been saying six to nine months although of course that’s highly variable based on geography and based on rep experience, but say six to nine months for your models..

Okay, great. And if I heard you correctly you said you had just hired a sales person in China, what else needs to be done in that market now you have the Trivex approval, you have the contract in place.

Are they just going out to sale at this time?.

Yeah, there is a lot, China is such an exciting story, but there is a lot needs to get done. We currently have without the rep on Board, we have four employees. When the rep comes on it will be five employees. We’re very much at the beginning of the story. I would say really what needs to happen is regulatory approvals.

You've heard us talk about trying to get to six of them. We now have three of them and you're going to get a bunch more as this next year rolls out, but I would say first things first, regulatory approvals. And then sorting out the distribution channel and then hiring a sales force. So lot of work to be done.

What's driving LeMaitre Vascular right now is Europe, the organic growth rate was 25% in Q3 and Asia is coming along. It's a much smaller piece of what we do, but in five years it should be a big player for us..

Great, thanks for the color. Just wanted to ask you about 2016, I appreciate you don't want to provide too much color just yet. Unfortunately we do still have to try to model 2016 estimates.

Just trying to get an early read on gross margin, you talked about the growth in Europe and Asia-Pac region assuming those are or some areas are slightly lower margin.

How do you balance that growth in those areas relative to maintaining your current growth margins or I should say more normalized gross margin in 2014, I’m sorry in Q4?.

Yes I guess one way to look at it is what are some of the headwinds and what are some of the tailwinds. I would say from a headwind standpoint to the extent that Europe and other OUS geographies continue to outpace the U.S. in terms of growth that's a headwind for you. The margins are generally lower outside the U.S. than in the U.S.

And to the extent that we sell more to China and export to geographies that's a headwind as well as those margins tend to be lower and then of course to the extent that we have rising manufacturing cost that would be a headwind as well, but I would say a lot of that is offset by the fact that we’ve done some nice work on XenoSure in terms of getting cost down and that really hasn’t played out for a full year and it will next year.

And with the introduction of the HYDRO I think you could expect to have sort of elevated cost initially and get those costs out over time and that projects is in process and I expect that that will sort of play out through next year as well and be a good guide to the gross margin next year and of course to the extent that we raised prices that helps margin as well.

So those are some of the pros and cons of the margin moving forward and yes we’re not giving guidance on next year so unfortunately can’t help you out much more than that..

Hey Jeff I would also like to jump in a little bit because the FX swings this year have been and of course we're 40% international here. So we're international. This plays out in our gross margin in a big way.

It's a story that we don’t talk much about, but if you look at 2014, our gross margin was 68.1 for the whole year and if you believe our guidance for 2015 stripped the FX effect its 70.3 and so while we’re not getting guidance on 2016, you do have a LeMaitre 220 basis point increase from full year '14 to full year '15.

So things seen to be going in the right direction..

Great. I appreciate the color. Congratulations and I’ll get back in the queue..

Thanks Jeff..

And our next question comes from the line of Mike Petusky with Barrington Research. Please proceed..

Hi guys, good afternoon.

I didn’t hear I may have missed it, but I didn’t hear you guys call out Valvulotome sales growth, do you guys have that figure handy by any chance?.

Yeah, Q3 organic growth was 11% worldwide..

All right great and then just a couple of more income statement questions.

I guess JJ is the 38% tax rate kind of going forward, is that still a decent way to think about the effective tax rate?.

Yeah it is. I think the Q3 was a little bit of an anomaly. We had some catch up going on as we changed our forecast and the ISO option exercises helped as well and so yeah I think you stay the course with that 38% or so..

Okay.

And then just I guess a quick question related to share count 18.5, 18.6 something like that for the fourth quarter is that a decent place to be?.

Yeah it is.

Alright great..

Fully diluted..

Right, right okay great and nice quarter guys. Thanks..

Thanks..

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

Hi, good afternoon and congratulations on the quarter looks really good. I guess a couple of questions one is you mentioned that you had a higher sales force turnover this quarter than you previously had.

What was the reason for that do you think?.

Right, Jan the numbers I was quoting was companywide it's my closet fact on that. So that's companywide. I’m sure it does drill down in the sales force as well. I feel as though around the company we’re seeing that -- we’re coming -- finally coming out of this Great Recession. So I feel that.

One thing we did do in July as we put in a higher entry rep compensation package in the USA specifically. So we made a material bump to their W2s as way to get at the potential burgeoning issue of rep turnover. So I guess that’s what we’re seeing and we’re not particularly alarmed by it happens. Our turnover is usually worse in the U.S.

sales force than it is in the international sales force..

But you don’t think this is an ongoing permit that going to keep you from getting to that 89 or 90 sales reps?.

No I don’t. I think you'll see us get there. It's been a little bit harder this year than we expected, but I’m not particularly worried about it and I think you will see us get there..

Okay.

And I guess the last question I had is on the Valvulotome but on the HYDRO and specifically you're getting some nice bumps from the conversion and where are you in that conversion?.

I don’t have the exact number around, but the last time we talked I think it was like 80% of the last call. It feels like sales dollar it's probably around 85% or 90% is HYDRO right now. The performance of the device is outstanding. We’re having no problems at all with it.

We're having some pricing issues in Europe where we’re trying to re-jig our pricing but up 11% organically for Q3. Q2 was up 22% and Q1 was up 22%.

We are starting Jan to get to the point where we're lapping the beginning of the HYDRO hard switch that we had always talked about this being four or six quarters worth of exciting growth and we’re getting there on that topic because when we come around to November we'll have left the USA price hike..

Okay, thank you very much and again congratulations on the quarter..

Thanks Jan..

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

Good afternoon, gentlemen..

Larry, how are you?.

Great George, congrats on all the progress. It's been a really good year. So my question is sort of a macro question.

You're the CEO, I know the CEO of any company worries about everything, but when you look at the year, you have to be feeling very good of course, but you can't feel too good because you always worry about what could be coming down the pike.

So are there any big issues or even smaller issues within LeMaitre itself that give you concern that the very impressive momentum you've been building over the last several quarters could slow down?.

Right.

What keeps you up at night question?.

Yeah exactly..

One thing that does keep you up at night is when you post the year with 13% organic growth and what 79% Op income growth, it does start to ratchet up expectations. So our fears of the shareholders getting ahead of themselves and sometimes the fear of ours.

But we've just keep the policy of just keep doing it and go quarter-by-quarter and whatever happens with the shareholder's mindset you can't really control that. So I think that's a topic obviously and I am addressing those folks right now. We had the same issues how do we keep the sales force growing, how do we attract great talent.

It's harder these days. I think Jan was getting at this in his question. It's harder to keep talent right now because the U.S. has 5% unemployment and go back four or five years ago and it was what 9%, 10% something like that and a depth to the great recession.

That's a different operating environment and maybe that's a topic of I guess those are things that I think about..

Yeah well maybe there will be a few sales reps available from the Endologix and TriVascular that followed..

We figured that would come up on our phone call today and we figured that we've nothing to do with that..

Well no, not exactly, but it is a sales force that does call on Vascular surgeons.

So to that extent I guess, but just curious if you have any thoughts on that deal? Anything you want to comment on publicly?.

It's an interesting story to the extent you're seeing regardless of how much you like or don't like the acquisition, the public stock markets are really responding negatively.

I think we're all seeing this in the Wall Street Journal, but the stock markets are responding exceptionally negatively to transactions and then obviously maybe we're coming into a time where earnings are valued more than sales growth maybe.

I don't know that, but maybe the stock markets are getting nervous about companies that aren’t producing cash..

Larry, its Dave. I might pile in that the hypothesis -- one of the hypothesis behind LeMaitre is that the endovascular growth rates would eventually slow down as the endovascular ran its course and open vascular surgery growth rates might recover and it might be a conversions over time and maybe we're seeing a little bit of that these days.

So perhaps there is some support to that hypothesis, but it's a long wait and so we shall see..

Yes, great guys. Keep up the good work. Very nice quarter..

Thanks Larry..

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