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

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

Welcome to the LeMaitre Vascular First Quarter 2016 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. Sir, please go ahead sir..

Thank you, Rania. Good afternoon and thank you for joining us on our Q1 2016 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, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today, May 02, 2016 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 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. Q1 2016 was another productive quarter. I'll focus on three headlines. First, we posted solid bottom line growth with op income up 43%. and net income up 58%. Secondly, we've expanded our sales force to 92 reps a high watermark and third in March we provided ProCol to add to our biologic offerings.

As for our first headline profit growth continued in Q1 with operating income up 43% to 3.3 million and net income up 58% to 2.2 million. And improved gross margin of 70.9% and op expense control powered the quarter's bottom line result. We posted record EBITDA of 4.1 million in the quarter up 31%.

As to our second headline we added six sales reps in Q1 reaching a high watermark of 92. These new hires were split between North America up 3 to 46 sales reps, in Europe up 3 to 36 sales reps. While Asia-Pac held steady at 10 reps. We plan to continue this reps surge through year end at which time we expect to have 96 reps on a pay roll.

While putting more feet on the street is a considerable investment we expect it will drive H2 2016 sales and 2017 sales. As for our third headline, our XenoSure vascular patch continues to underpin our growth up 22% in Q1 to a record $3.5 million combined with our Omniflow vascular graft biologics accounted for 22% of Q1 sales.

Based on our recent successes with biologics, in March we acquired a third biologic product line the ProCol dialysis access graft, ProCol is approved for sale only in the U.S. while Omniflow sells international. We acquire ProCol for $2.7 million or 2.1 time sales.

In 2017, we expect biologics will be our largest product category surpassing even Valvulotome. As I hand the call to JJ I would like to restate our two simple financial objectives 10% annual sales growth and 20% annual profit growth..

Thanks, George. Gross margin in Q1 2016 was 70.9% up a 170 basis points from 69.2% in the year earlier period. The increase was primarily driven by average selling price increases and a reduction in the initial manufacturing cost and was partially offset by unfavorable geographic and product mix.

In Q2 2016, we expect the gross margin to be 69% due to expected manufacturing inefficiencies and the newly acquired ProCol product line. For the full year we expect the gross margin to be 70.5% as the gross margin improves in Q3 and Q4.

The effective tax rate in Q1 2016 was 33.7%, the comparatively lower rate was largely due to higher profit outside the U.S. and the use of available NOLs at our Australian subsidiary. We expect our 2016 effective tax rate to be approximately 36%. Cash at March 31, 2016 was $25.9 million a decrease of $1.5 million from December 31, 2015.

The decrease was largely due to the ProCol acquisition and working capital uses. On April 25, 2016, our Board of Directors approved a quarterly dividend of $0.045 per share to be paid on June 8, 2016. With respect to ProCol we expect full year 2016 sales of $700,000 as well as an operating loss of $700,000.

The losses are driven largely by one time manufacturing integration charges as well as inventory purchase accounting. We expect the acquisition to be neutral for the bottom line in 2017 and accretive to the bottom line in 2018 by approximately $ 1 million. All effects from the acquisition are included in our 2016 guidance.

That's the guidance we expect Q2 2016 sales of $21.6 million a reported increase of 9% versus Q2 2015 and up 7% organically. We also expect Q2 2016 operating income of $3.2 million, a 15% increase versus Q2, 2015. For the full year 2016 we expect sales of $85.7 million, reported increase of 9% versus 2015 and up 8% organically.

We also expect full year 2016 operating income to increase by 24% to $14.3 million. Before opening up the call to Q&A I would like to remind listeners that LeMaitre will be presenting at a number of upcoming conference is including Benchmark in June, East Coast IDEAS in June, Canaccord in August and Three Part Midwest in August.

With that I will turn it back over to the operator for Q&A..

[Operator Instructions]. And our first question comes from the line of Rick Wise from Stifel. Your line is open..

Just a question about guidance. It looks like you lowered organic revenue growth guidance for 2016. Can you just run through the reasoning and has there been any weakness that manifested over the first quarter in a particular revenue category or geography and then just to touch on gross margin, you lowered it by 50 basis points for the full year.

Is this primarily ProCol, that acquisition and should we expect a better second half improvement in its gross margin and just touch on some of the headwinds and tailwinds there..

So organic growth from the last call for the year was 9%, it's now and 8% for the entire year. A bit of that’s already been realized, you saw in Q1, we had a 7% organic number we thought we're going have an 8% number.

But as you go forward we think about the balance of the year to reiterate guidance is going up, it's going up by some of from the acquisition of ProCol plus other things, some other strengths and weaknesses we've noticed are the Saudi Arabian government took to $300,000 purchase order away from us and we assumed most other vendors based on the price of oil for Q2.

So we had that as a concrete change to our business that we didn't know about that you saw last time and China has been a little bit weaker around the TRIVEX topic than we expected. So I would say generally the move from 9% to 8% yearly organic growth, while we don't consider that a big deal it is driven by Saudi and China..

And then just touch on China with TRIVEX can you just discuss what you are seeing there specifically? Has it kind of delayed you being able to pull through your broader portfolio of registered products in China and then maybe just update us on where you are with switch registrations for new product?.

Okay, some really good news on registrations, I'm glad you asked that. We did oddly on the same exact day received approval from number four and number five for the Single Lumen Embolectomy Catheters and then for crowded shunt.

So we now have effectively 35% of our worldwide sales portfolio approved in China and then just to delink it from TRIVEX, it really has no bearing.

We actually have two different very different channels in China one is TRIVEX through one master dealer for the whole country, it has its own issues and then the other one, the pull through you’re talking about I'm glad I'm using that word the reps that we have and the general manager we have and all of that and that's to do with the other four product lines, so no it's not affecting the other things which are all as we know very much in startup mode in China, the real established business in TRIVEX and the product manager at TRIVEX dealer has decided to move on and so we’re sort of out guessing that our business is a little weaker based on Chinese TRIVEX product manager leaving..

And then just one last question, so we will how we always talk about deal activity and you just finished the ProCol acquisitions but some of our other companies are reporting or commenting that medical device valuations might be high for potential targets.

Can you just tell us what you're seeing in the marketplace and maybe what expectations you have with valuation? Are the deals getting at least in the ballpark of what you think is an appropriate valuation and then just in the absence of deals, can you just remind us about what your priorities are for cash? Could the dividend get bumped up or do you have plans for internal product development or clinical trials? Thanks so much..

Drew, you nested six questions inside of a question you’re trying to get to with JJ, we love the interest. We’re going to take these one at a time, maybe Dave works on the acquisition side, maybe we do capital allocation after that, we get back to the year-long gross margin question about profit -- the gross profit margin question you had before. .

Obviously we all saw that [indiscernible] deal got printed last week, 5.5 almost time sales and there has been another deals like Endologix and Trivascular last fall in that range. So we do see the public side but really LeMaitre is playing more on the private side or in deals which aren't real competitive and they're very situation driven.

So, ProCol you just saw us pay 2.1 times sales. I can't really say that there's a grounds to all of valuations going up. I think it's just limited to each particular target and whether or not you know certain multiple is good really just depends on the intricacies of that opportunity.

So there could be some what the higher multiples that are still attractive to us..

And Drew, your capital allocation question that you asked in the middle of that. We did do a deal in Q1 obviously, this ProCol deal, so we love putting money towards these acquisitions. We continue to hunt for larger deals and more of them.

So that’s number one where we want to allocate capital and you ask we’re going to raise our dividend, we just did raise the dividend in February.

We sort of do this usually and I don't wants to going to happen next year but we usually do it on an annual cycle and it went from $0.04 for each of the quarters last year and it's now in the middle of a run of $0.045 but of course it gets approved at every single board meeting so I can't pretend to understand what the Board's going to do next quarter but typically it's $0.045 this year.

That's our capital allocation methodology. You're right we're piling up cash in our balance sheet and then what do you do with it, I think our answer is cash and dividends right now..

Yes.

And Drew somewhere in there I think you asked about the gross margin, in terms of Q2, I think it's pretty transitory but the way we do our accounting we pin up experiences from standard upon on the balance sheet and then they come back onto the P&L at different times and in this case, in this particular quarter just so happen that a bunch of negative variances are coming together for different product lines at the same time doesn’t usually happen.

So I'm talking about a 69% in Q2 but I think that’s transitory, the more permanent piece is the ProCol addition and with our step up in inventory for our purchase accounting we’re probably going to have a 30% or 35% gross margin for ProCol for a year plus or so and so that’s going to be a short to medium term headwind for the gross margin line maybe by 0.3% or 0.4% or so.

So those two sort of conspire for not so great answer in Q2 but a nice recovery I think going on in Q3 and Q4 because behind the scenes operational folks are doing a pretty nice job and I think that'll come out in Q3 and Q4 and so you see the recovery..

And just to summarize on the gross margin, you went from 68.3 in '14 to 69.1 in '15 and our guidance is 70.5 in '16. I feel as though you can see the production efficiencies around XenoSure largely come into play over those three annualized periods..

And our next question comes from the line of Jason Mills from Canaccord. Your line is now open..

This is actually Jeff Chu filling in for Jason. Dave maybe I just want to continue on with leave offer where you left off on a question on M&A. So over the past year you've demonstrated a great deal of financial discipline when evaluating potential acquisitions and you've certainly expressed in the past that there's plenty to buy.

In terms of the targets that you're looking at what are potential dollars looking for? Is it scale or is it price?.

I didn’t quite hear the end of that?.

Yes, what are sellers looking for? And is it scale or is it just in terms of pricing?.

You know it's individualized but I think for us you know as I look at the pipeline like I said each opportunity is different. We have a range of smaller and larger deals, I think I've mentioned publicly that last year we were looking at deals with transaction values in the 20 million and 30 million range.

So we have looked at larger deals and so you know regardless of the size of the deal price is always a topic.

In fact, just this past week, I was making an offer on a property were I think valuation was an issue but you know there are like I said before there are plenty of opportunities out there, Jeff that are large and small and you know we're sort of turning over every stone in and for us.

I think we've always said more important than doing a large acquisition which we would absolutely love to do is to do the right acquisition.

So in this instance even though ProCol was small we should all remember XenoSure started small and not that this will be the next XenoSure but provided a lot of growth for the company and so ProCol I think it will have a nice growth profile over time and it will prove to be a good addition to the bag..

George, I wanted to focus on your product pricing strategy and your expectation for price increases going forward. I appreciate that your 2016 guidance calls for a growth balance between both price and units but kind of given the challenging environment from hospitals and payers, they're starting to push back on price.

How sustainable are these increases going forward?.

Right, I think the best way to answer that if we could all look at the price hike chart on the presentation we throw on the web there and I would say about a decade ago.

We were talking about 6 and 7 percentage wise every year annually and I feel like now we're talking about 3s and 4s, it depends on how much innovations is in your product but I would say yes it's getting a little harder but we still feel like versus most of our peers we still have a lot of pricing power due to our nicheness..

And our next question comes from the line of Chris Lewis from ROTH Capital Partners. Your line is now open..

I wanted to start on ProCol.

Maybe I was hoping you can spend a minute kind of walking us throught the rationale behind the acquisition, how you think that layers in to the product offering and what's been the receptivity from the sales force since that product was added to the bag?.

Sure, maybe I'll start with the rationale and then George, interface a lot with the sales force he can talk about the reception in the market but ProCol I think as people on this call may know is a biological graft for dialysis access.

Of course LeMaitre has had a lot of success with biologics driven primarily by XenoSure but also by Omniflow and Omniflow is a biological graft, it's approved not in the U.S., only outside the U.S. and it's used mainly in the leg as a leg bypass. ProCol on the other hand is only approved in the U.S..

It's not approved O-U.S., it was approved through a PMA approval back about 12 years ago and it's used for dialysis access and that's a very interesting market because our sales reps are calling on vascular surgeons who are creating dialysis access all day long, we have a couple products that are already used in that space are anastoclip device, embolectomy catheter and even PTFE.

There are really two main biologic competitors if you exclude the allografts in that space and that’s our device ProCol and one other device. We acquired the smaller of the two market share, players in this space and we think just strictly because of the size of our channel at 46 sales reps in North America who are probably 43 in the U.S.

and their focus on the vascular surgeon. We're very optimistic that it will be a good acquisition and they will now make the cells growing, in fact just one more piece of color and then I will let George jump in here.

In the last two worldwide sales meetings, I pulled our sales force -- what was the number one product you would like to add to your bag and in both of those meetings the answer was a biological graft. So I think they will be quite excited about it although it goes from a very small base in the U.S. and George I will let you add any color..

And the question you were talking about how excited the sales force is, that’s a great question, it's probably the right a question to ask.

So in Europe easily the Omniflow devices, the 2 or 3 device that they pull out of their bag when they visit vascular surgeon and very early on we're only -- I don't know a month and a half into this thing, very early on I feel a real amount of excitement from the U.S. sales force.

They've been jealous of the European sales force that the European sales force had Omniflow and they didn’t have an analog to sell. So they finally have that, they're thrilled, it is much smaller than we want it to be but it's something and it has the perfect approval. So I think they're very excited. Of course time will tell..

And for the manufacturing integration with that product, can you perhaps walk us through what we should expect there and potential timing expectations and as that does become fully integrated where do you think gross margins for that product expand to overtime?.

Yes so Chris, I think we're probably looking at an integration of 12 to 14 months-ish in that range and I think the margin now with our purchase accounting is sort of in that 30% - 35%range probably goes up to 60 initially and then if we can bring some savings out over time we go up from there may be like we did directionally anyway with XenoSure.

So I think there's potential for a good margin, but as it ways out the transition piece is probably a $600,000 or so transition integration cost, transition project over that time frame that I mentioned.

So it will cost a little bit to get it in-house and then we'll repair it after we do and get those margins up to sort of corporate margins over time I bet..

Just one more for me. George you mentioned some of the international markets maybe a little bit below expectations but what the U.S. grew year over year but maybe down you know versus kind of the year over year quarterly growth rates that you've been seen in the past few quarters here? Maybe you know can you just talk about how that the U.S.

trended during the quarter and what you saw there versus the rate?.

Yes, you know I'm glad to bring that up because it's actually better than what you see in the press release.

I think you see a reported growth rate for the Americas at 3% and the truth is it was organic 3% but last year we had a major OEM order to factor in [indiscernible] which was always seen as a onetime order and so really if you strip that out you did a 5% and you're going back to 2015 in your question you're saying and I agree we had a phenomenal Americas last year, it was a 10% organic growth rate and so comping off that it's a little bit difficult but I think the good news, I actually feel like we have a real spring in our step in the United States.

You know that I've done a sales force management transition underneath me and I've gotten four regional managers', three regional managers, and a VP of Sales out of the sales force and replace them with people I think have a chance of being a lot better than they are and we've also been able to amp up the number of sales reps from 42 in Q1 '14 and there will be 47 in Q2 of '16.

So you have a real sort of 12% or 14% body count increase and you also have a new management team to go along with that ProCol graft and the excitement is being created by that so.

I actually feel like as the year goes on we're going to start feeling better number particularly in the Americas, so I'm excited about that and I'm glad you asked that question..

[Operator Instructions]. And our next question comes from the line of Larry Haimovitch from HMTC, your line is now open..

Lots of good questions have been asked, the only I want to ask on top of what's already been discussed is you mentioned something I thought was interesting that -- I think you said next year our biologics business would be our single biggest product line? Did I catch that right?.

We were hoping someone would take the bait on that, yes..

Okay. I did and I wasn’t set up to do it either. So what are the strategic implications of that or what does it really mean? You obviously mentioned that for a reason.

I'm just curious what your reasoning is on and why you wanted to bring that up as a topic?.

There are two big reasons, one is we want to keep telling people we're trying to be more biologic and believe it or not we're also trying to be more endovascular. So we're trying to tilt our business towards those two more attractive segment, I think.

So that’s important and secondly I think it's important to notice when there's been a changing of the guard and there now has been -- well there's about to be we're calling it if you will, so this has always been Valvulotome centric company and we have always been sort of left with -- well the valve becomes a wonderful product line but the unit growth profile is not sort of what you'd love to see.

Contrast that with what you've seen go on the last five years [indiscernible] we're repeatedly coming to you guys with 30s and 20s and 40s for growth numbers on a unit as well as a sale basis.

So we want to underscore for folks that what colors the generic growth rate of the company is now that bucket of biologics rather than a bucket of Valvulotome and we think it's important..

So basically what you’re saying it's a product line which has much better growth prospects than Valvulotome and gives you a better visibility on unit growth?.

Yes in retrospect. I think I would rather be a biological company than a Valvulotome company and we're about to become that..

Yes, and would you -- can give ballpark guess of what the biologics product line might be next year without any further acquisitions? Just a very rough ballpark.

I know I'm asking for guidance way out but just 25 million is that reasonable?.

You want 2017 guidance or 2016 guidance?.

You could throw either. I'm just curious how big that product line is in your mind this year and even next year, just again a real ball park number..

Well maybe we cut the difference by doing market. So we think that patches not biologic patches, but patches is a $70 million dollar market and we're selling what we just said 3.5 times 4, we’re selling 14 million of those at today's run-rate, Q1 forget about Q4's run-rate.

So maybe we’re 20%ish of that market or something like that and we feel as though we have the most appropriate sales channel to sell those things and we think those things are growing because vascular surgeon love biologics more than inert devices..

The biological grafts are another I think picture perfect market for LeMaitre to go after another $70 million market with relatively limited competitors where I believe our focus couldn’t be better in terms of our number of reps and the specialty call point..

And George, just to clarify your comment, the $70 million market, is that including the market that ProCol will address or is that not including ProCol?.

No that’s just patches, it's not even just biologics, it's patches and the market the ProCol is in an $11 million current market of biological tubes sold in the U.S. of which we will have one effectively and another guy will have 10..

And then on top of that there are allografts which are biologics as well..

And then there is the European tube biological market as well which is another $5 million to $8 million. So you maybe you call that whole thing $20 million worth of biological tubes on top of again apples and oranges here 70 of patch market worldwide..

And George, who is the big player that -- is the 10 million versus your one in the ProCol market?.

It's a small company called Artegraft in New Jersey with no sales force.

Now Dave, that's probably an interesting acquisition target someday right?.

Thanks for the suggestion..

Is that a no comment? Thank you, guys..

And our next question comes from the line of Mike Petusky from Barrington Research. Your line is now open..

Couple of questions, I guess just following up on the commentary around revenue growth in the Americas. In terms of the guidance for '16, the revenue growth, I mean is it fair to say kind of you know in ball park terms kind of mid-single digits in the Americas and then maybe low to mid-teens and O-U.S.

is that a fair way to think about what you guys were seeing?.

Yes. Sorry I haven't split out my mind, Q3 and Q4 but I do know H2 as this rep surge starts to kick in.

H2 is a different land than H1 for the worldwide entity, I think reported was 8 or 9 for the two quarters and I feel like it's more like 11 and 13 or something like that for the worldwide entity, Mike and I apologize not doing the Americas right now for you..

And the guidance implies 11% worldwide growth reported in the second half..

For H2 and it's more like 9% reported in H1, I think 8%. So 8% H1, Mike and 11% reported H2. Worldwide numbers not specifically addressing your question..

And then do you guys have by any chance the hard number, I didn't catch it if you mentioned it the Valvulotome revenue and the growth year-over-year?.

We don't have that at hand, we didn't mention it for some reason, we do know the organic growth rate -- the annualized organic growth rate for that thing should be about 10% this year, annualized organic growth rate not the actual from Q1, that was a different number..

Let me just a housekeeping item, do you guys have the CapEx and stock comp for that quarter handy by any chance?.

Stock comp, all noncash are a 1.2 million in the quarter, Q1 and CapEx $700,000..

And I'm not showing any further questions. 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..