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

Drew - Stifel Nicolaus Cecilia Furlong - Canaccord Genuity Joe Munda - First Analysis Charles Haff - Craig-Hallum.

Welcome to the LeMaitre Vascular Q3 2017 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir..

Thank you, Amanda. Good afternoon and thank you for joining us on our Q3 2017 conference call. With 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'll 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, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today, October 26, 2017, 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. A reconciliation of GAAP to non-GAAP measures is 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 2017 was another productive quarter. I'll focus on three headlines. First, we posted strong bottom line growth with net income up 56% and EPS up 49%. Second, despite a tough prior year comp, we had our second highest sales quarter ever and third, our recently acquired RestoreFlow Allografts continue to outperform expectations.

As for our first headline, we generated record net income of $5 million in Q3 up 56%, which translated into record EPS of $0.25 up 49%. A 70.8% gross margin, operating expense restraint and a low effective tax rate contributed to our bottom line. As a result, we're increasing our annual EPS guidance midpoint to $0.84 a 53% year-over-year increase.

These extraordinary bottom line results helped push our cash balance to a record $37.5 million up $7.4 million in the quarter. As to our second headline, Q3 sales were $24.8 million, our second-best quarter ever.

As previewed on our Q2 earnings call, Q3 2016 was a difficult comparison period because there were two major product stories, which temporarily increased sales. Our principal patch competitor went on back order and due a Valvulotome recall, our customers pulled the HYDRO sales forward into Q3 2016.

Separately in Q3 2017, hurricanes in Texas and Florida also affected LeMaitre, producing revenues by approximately $250,000. As a result, our Q3 2017 growth rate of 7% was down from 17% in H1 2017. And looking ahead, our guidance midpoint implies a Q4 growth rate of 13%.

As to our third headline, our most recent acquisition Restore Flow Allografts continues to perform ahead of plan and our North American sales force is excited about this product. Full year 2017 revenues from tissue processing services should be approximately 60% above pre-acquisition levels.

As we've highlighted on previous calls, Biologics continue to drive growth, accounting for 35% of Q3 sales, a high watermark. Our fundamental financial goals remain the same. We continue to pursue 10% annual reported sales growth and 20% annual Op income growth. I'll now turn the call over to JJ..

Thanks George. Our Q3 2017 gross margin was 70.8%, a sequential improvement of 280 basis points over Q2 2017. The increase was driven largely by manufacturing efficiencies across a number of product lines, favorable changes in foreign currency exchange rates and average selling price increases.

Our effective tax rate in Q3 2017 was 1%, driven largely by increased employee stock option exercises. This reduced tax rate resulted in a record net income of $5 million a 56% increase. Earnings per share were a record $0.25 in the period a 49% increase. We finished Q3 2017 with $37.5 million in cash, an increase of $7.4 million from Q2 2017.

Cash increases in the quarter were driven by record cash from operations of $8.2 million as well as receipts from stock option exercises of $3.2 million. Of course, this cash gives us capital allocation options whether it be operational investments, share buybacks, acquisitions or increased dividends.

Turning to guidance, we expect Q4 2017 sales of $25.8 million to $26.6 million, a reported increase of 13% at the midpoint and an organic increase of 8% at the midpoint. We also expect a gross margin of 70.3% in the quarter and operating income of $5.7 million to $6.3 million, growth of 53% at the midpoint.

We're also guiding earnings per share of $0.19 to $0.21 growth of 49% at the midpoint. For the full year 2017, our sales guidance is $100.6 million to $101.4 million, a reported growth rate of 13% at the midpoint and an organic growth rate of 7% at the midpoint.

Our full year gross margin guidance is 70.2% and our operating income guidance is $20.4 million to $21.0 million, growth of 27% at the midpoint. Our earnings per share guidance is $0.83 to $0.85 per share, growth of 53% at the midpoint. With that, I'll turn it back over to Amanda for questions..

[Operator instructions] Your first question comes from the line of Rick Wise from Stifel. Your line is open sir..

Hi guys. It's Drew in for Rick tonight. Just to start on the third quarter, George, I think I heard you say that the hurricane was about $250,000 impact but when you just add that back, it still a shortfall for your 3Q guidance.

So, besides the hurricane, can you just talk about maybe some of the other factors that led to the shortfall, first your expectations?.

Sure. Of course. So probably principally the weaker Valvulotome than we expected and that sort of been a theme of the year. We put in a lot of the fixes on the Valvulotome quality issue from last year. I am sure you remember that famous story in Q3 of '16 and the product hasn’t bounced up as quickly as we thought it would.

So I would say, if you had to allocate dollars roughly speaking, I would say we think we lost about $3.50 versus what we had expected we gave guidance on July 28 or July 27, and I would say in China we've a TRIVEX slowdown where we're sort of -- we've kind of gotten into with our distributor about them fulfilling and not fulfilling the contract and we're trying to figure out what to do going forward with them in TRIVEX and I'd say those three things if you wanted to simplify the myth, those would be the three things..

Okay.

And on the TRIVEX distributor, is that the only product that distributor sells or is there other pieces of the portfolio?.

Yes. In China we sell one product TRIVEX through one distributor and then the balance of the four other devices through a master distributor who really isn't the real main person at sub distributors underneath them, but in short answer to your question, yes, it's the only product that distributor sells for us..

Okay. And just moving to the fourth quarter guidance, so you're calling for a range of $25.8 million to $26.6 million and I think if my memory serves me correctly this is the first time you've given a revenue range versus specific revenue target.

So, can you just talk about your assumptions for that range? What has to go wrong to basically get you to the bottom end what has to go right to get you to the top?.

Okay. So, we didn't look at it that way Drew. The way we looked at it was the midpoint they were giving you right now would be equivalent to the old single dot point guidance that we used to give you and the rashes. So, we're not thinking about what the band means. What has to go right away or what has to go wrong.

We would like to see that as the equivalent is what we used to give you the rationale for moving to a range if that might be part of your question is. When we got into this, giving quarterly guidance three or four years ago, we never used to give quarterly guidance.

When we got into it, we thought we were small enough and we thought we didn't have enough followers to spend people's time digesting what a range might mean.

So, we tried to simplify it for folks and we feel now with the greater share volume and eight analysts following us that we should be more like the other companies, all of whom give ranges rather than a single point..

Got you.

That makes sense and just sneaking a last question about M&A, so the portfolio I think is now running about mid-30s for Biologics exposure and if we're almost anniversarying the Restore Flow acquisition, just how as we look forward and thinking about your M&A opportunities, is the portfolio now too heavily indexed to Biologics or should we be seeing another push sooner or later to drive that exposure higher?.

Drew it's Dave. Thanks for the question. We do not believe it's too heavily indexed to Biologics. The Biologics products in our bag as a portfolio are going faster than the nonbiological products in our bag. So, we do continue to look for more Biologics.

There are other types of grass, other types of patches, even Biologics blues and sealants, things like that. So, I would say we still really like the Biologics space..

Great. Thanks guys..

Thanks Drew..

[Operator instructions] Your next question comes from the line of Jason Mills from Canaccord Genuity. Your line is open sir..

Hi. This is actually Cecilia Furlong on for Jason and I just wanted to continue on the Biologics and if you could just provide relative contributions during the quarter and any commentary around XenoSure sales that would be great..

Okay. Sure. Hi Cecilia. How are you doing. I'll try to do that for you. So, the Biologics continue to be the driver at the company at a very high level. Their growth rates are higher than the balance of the company.

Of course, in Q3 we all knew this was coming, but in Q3, the XenoSure growth rate was I think it was minus one or plus one or something like that JJ.

Am I doing that right?.

Yeah, a couple down, yes..

Okay. And so, we all knew that was coming. This is expected by all of us. We don't expect that to be the norm. I believe the growth rate for the year for XenoSure looks to be about 21% and so we're thrilled about that big number.

But in terms of in Q3, the growth rates for the other products I think our Omniflow was 14%, ProCol was 11% and RestoreFlow, there is no organic growth rate to give you, but it was an sales number and as we mentioned at the top of the call as I mentioned in my script piece, we think we're going to get a 60% growth rate in '17 versus the business that we bought November 15 of 2016..

Okay. Great. And then also if it's possible, would you be able to provide an estimate of what organic growth in the quarter would have been excluding the hurricane and one-timers from the year ago quarter and then just your thoughts around organic growth going forward as well..

So yes, so the organic, the hurricanes we think we're about $250,000 or maybe a little more than 1% or so. So, the organic growth rate would have been more about breakeven..

And then ex one-timers from the prior year period as well..

No one timers in the prior year period. Okay. Cecilia you're getting at the Baxter backorder and we haven't done that work to give you that number..

Okay. Great. Thank you very much..

Thank you..

Your next question comes from the line of Joe Munda from First Analysis. Your line is open..

Good afternoon, guys. Thanks for taking the questions..

Hello Joe..

Real quick. I was wondering if you could provide us maybe some commentary or color on the search for a new sales leadership in both the Americas and Europe? Any color there would be great..

Okay. Terrific. Thanks Joe for asking that question. It's very relevant. So, the retirement of Peter, the GM for Europe was September 30, but of course we had had a long lead in on that. We knew he was retiring about three months prior to that. So, the search is going quite well. It got up and going very quickly. We've had some fantastic candidates.

My sense is that the search will close and the hiring will happen Q1, Q2. We're a little bit slower out of the gate on the American search for VP of the Americas. In both these instances, and I would say, that thing probably happened faster once it starts to happen. So maybe that thing closes at the same time Q1 Q2.

I would say as a silver lining to all this, it's fantastic for me to get a chance to straighten out a bunch of issues and get into these things with all the regional managers.

So, I have a bunch of regional managers on both sides of the Atlantic reporting to me as I did back in 2015 when we had the American changeover as well and I think it's fantastic to expose them directly to the CEO. I have different angles, slightly different angles on topics and projects.

So quick answer to your question, Q1 Q2 for both of those searches, but in the meantime, I think there is a lot of good things happening in the direct communication between myself and the regional managers..

Okay. Thank you.

And then as far as could you give us some color or split out what the rep count looks like North America, Europe, rest of the world?.

Sure, the Americas are at 46, which is roughly stable for all year and Europe is down by three, it's 33 for a total of 89 including 10 from Asia, which hasn’t moved much.

And I would say one thing just to go back to your previous question as Peter just retired three weeks ago, but inside of the summer, we have found in a good way some personnel topics that we've been able to start addressing over there that maybe they didn't want to address that over the last three or five months because of their time it was upcoming.

And so, we're getting some nice personnel movement. We want many of these things to happen..

Okay. That's helpful and then I guess my last question, JJ I am looking at the guidance here, gross margin is going to be slightly better pre -- current guidance versus prior then the midpoint of the Op income guidance appears to be lower than the previous guidance.

So, I guess could you give us some picture or some color what's going on as far as margins are concerned?.

Yeah, I mean for the year Joe, I think we were ticked up by just 0.2% or so and the beat in Q3 had a lot to do with that 0.8% beat from where we were before. So, for the year end we're sort of getting a lot of puts and calls on this.

The more restore flow sales we'll bring it down a little bit yearend clean up brings you down a little bit, turn on of the clean room maybe brings you down a little bit. But more Valvulotome sales I think we're expecting to be fairly bullish sequentially with Valvulotome and XenoSure as well and those who help the margin.

So, some gives and takes there, but up 0.2 for the year..

All right. Thanks guys. I'll get back in the queue..

Thanks Joe..

Your next question comes from Charles Haff from Craig-Hallum. Your line is open sir..

Thanks for taking my questions. Getting back to margins there, I think you said gross margins you had some pressure last quarter from Omniflow and ProCol.

I'm wondering if the gross margins are starting to improve there as you saw the higher growth rate?.

Yeah, to the extent that HYDRO and the Valvulotome's and XenoSure do well, that certainly helps the margin. On RestoreFlow and ProCol they're in a little band for now.

RestoreFlow is sort of in the mid-30s gross margin, but that's going to improve fairly quickly over the next few quarters as we get away from purchase accounting topics, which are fairly hefty in the case. So, I think you're going to get a good answer there as you move forward, but right now it's a drag on the gross margin..

Okay. And then for sales and marketing you showed very strong leverage this quarter. Is there anything to note there..

So, with sales and marketing, we were down a couple reps sequentially and our VP of Sales in the U.S. was not in the quarter as well and so that helped in terms of getting leverage on the selling and marketing line I would say. But, we've been getting that leverage in prior quarters as well. I think we were at 26% or so as a percent of sales in Q2.

So, it bounces around a little bit, but I think that's sort of the specific answer in Q3, and then maybe as we hire up the VP position again it ticks up a little bit, but not too much..

Okay.

So, would you expect this level for the fourth quarter until you fill the VP position in the North American region?.

I guess I would answer by saying our OpEx sequentially Q3 to Q4 looks like it's kind of flat and so baked within that there's some ups and downs within the different areas, but I would generally yeah that's probably decent assumption..

Okay.

Great and then let's see, for XenoSure, can you give us any updates on Australia or Japan regulatory process?.

Okay. So, no update except that Australia went in on June 30. Am pretty sure that we talked about that on the July 27 phone call and now it's a waiting game and we generally think that's an 18-month waiting game from the June 30 submission.

China, you didn't ask that, but I'll it answer it anyway, the China trial is up and running here we got 25 patients enrolled. It's a Gooch slower than we want it to be, but it's up and running and we're really excited about that and again we're thinking 2021 for an approval. So, this is going be a long one.

In Japan we're also currently thinking 2021 and during the quarter, we got some reasonably good news from the Japanese MHLW and they're believing that it's not going to be a human clinical trial but rather an animal trial and so that shortened that thing a little bit and maybe before we were thinking 2023 in Japan and now we're thinking 2021 or something like.

I don't think we're -- I think we understand China and Australia right now better than Japan, but we were quite pleased with the initial ruling that we got from the Japanese MHLW..

Okay. Great. Thanks for the color there George.

And then on the GAAP tax rate, what do you think we should be using for the fourth quarter and for the full year '17?.

Yeah well kind of a Bucking Bronco there with the tax rate over the quarters and has a lot to do with stock option exercises and so a 24% rate in Q1 in '15 and now one, I'm going to guess if you go back into the mid-30s maybe 33%, 34%, 35% somewhere in there for Q4, that's probably a good placeholder.

I can't stop to predict what stock option ex-employee, stock option exercises are going to be in Q4, but if you factor in some kind of maybe reason assumption that isn't extreme like it was in Q3 you get to that 33% to 35% place..

For the full year?.

For the Q4 and so then full year will be will be -- yeah, your full year will then be around 19%..

Okay. Great. Thanks for taking my questions..

Okay. Thanks Charles..

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