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

Rick Wise - Stifel Cecilia Furlong - Canaccord Genuity Raymond Myers - Benchmark James Sidoti - Sidoti & Company.

Welcome to the LeMaitre Vascular Q4 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, Skylar. Good afternoon and thank you for joining us on our Q4 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, February 21, 2018, 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. Q4 was another healthy quarter in which we posted sales growth of 15% in the Americas and 22% in Europe, Middle East, Africa. The increase was driven by Valvulotome and XenoSure. Only Asia held us back in Q4, as we are in the midst of transitioning away from our two master importers in China.

Soon, we'll start selling to our own group of distributors from our Shanghai office. Eliminating this layer of middle man is a typical move from the LeMaitre playbook. This transition left us with no Chinese revenues in Q4 2017 versus a normal rate of about $400,000 a quarter. So, the year of 2017 ended with 13% reported and 7% organic sales growth.

The key drivers were our biologic products including 20% share growth. We also posted 29% annual Op income growth, over the last three years our op margin was 15% in 2015, 18% in 2016, and 21% in 2017.

We're guiding 23% in 2018, these continued op margin improvements are the result of double-digit reported sales growth and high single-digit op expense growth, this increased profitability, our $41.7 million cash balance, and the new lower federal tax rates have all combined to give us a wide array of strategic and cash return alternatives.

In this quarter you're seeing this result in a 27% dividend hike, but this cash will also find its way into future acquisition and internal investment opportunities. I'd like to close by reiterating our financial goals. We continue to pursue 10% annual reported sales growth and 20% op income growth. I'll now turn the call over to JJ..

Thanks George. Our Q4 2017 gross margin was 69.8%, versus 69.5% in Q4 2016, the increase was driven largely by favorable mix as China and distributor sales declined. Op expenses in Q4 2017 were $11.9 million down 3% versus the prior year period.

Lower operating expenses were driven by general cost cutting measures, fewer sales reps and lower sales management costs. Combined with increased sales this cost control allowed us to post record operating income in Q4 2017 of $6.3 million representing a record of 24% operating margin.

Our effective tax in Q4 2017 was 32%, for the full year our effective tax rate was 19% as stock option exercises reduced the rate by 17%. We expect our 2018 effective tax rate to be approximately 25%. We finished 2017 with a record $41.7 million of cash, an increase of $4.1 million from Q3 2017.

Cash increases in the quarter were driven by cash from operations of $6.8 million which were partially offset by capital expenditures of $1.6 million and dividends of $1.1 million.

For the full year 2017 our cash increased $17.3 million, our Board of Directors recently approved a 27% increase in our dividend from $0.550 to $0.07 [implying] [ph] the yield up 0.8%. Turning to guidance we expect Q1 2018 sales to be 26.0 million to $26.6 million, a reported increase of 9% at the midpoint and organic increase of 4%.

We also expect the gross margin of 71.5% in the quarter and operating income of $5 million, to $5.6 million, growth of 25% at the midpoint. We're also guiding EPS of $0.19 to $0.21 growth of 21% at the midpoint.

For the full year 2018 our sales guidance is a $110 million to a $111.6 million, our reported growth rate of 10% at the midpoint and an organic growth rate of 7%. Our full year gross margin guidance is 71.5% and operating income guidance is $25.4 million to $26.6 million growth of 23% at the midpoint.

Our annual EPS guidance is $0.96 to $1.00 per share, growth of 14% at the midpoint. With that I'll turn the call back over to Skylar for questions..

[Operator Instructions] Our first question comes from Rick Wise with Stifel, your line is now open..

Good afternoon everybody, and I think I could fairly say congratulations on an excellent quarter despite the Turner headwind and congratulations on cracking the $100 million barrier, seems like a noteworthy milestone. Perhaps you could talk a little to us a little bit more about the China situation, from several vantage points.

One what have you assumed, what's assumed in your 2018 guidance and help us if you could give us a little more color on what your plans are and actions and what we should expect in terms of getting back to sort of 'normal' in China..

Rick, by the way thank you very much for the question and the $100 million comment we agree it is a milestone of sorts. We'd always been told when we got to $100 million there'd be some kind of big parade for us so we're real excited about that. Does feel a little bit more substantial so thank you for recognizing that, appreciate that.

In terms of China this is a fairly standard piece of our playbook, right now we're in a four-layer system so looking back six months it was LaMaitre sells to a master importer who brings it into China who then sells to a layer of distributors who then sell to hospitals.

We're almost through with the transition now, we haven't shipped our first order but we're about to become LaMaitre Shanghai ships to a sub-distributor who we now call a distributor who ships to a hospital and specific reference so we're just taking a layer out and, in this change, out we haven't started booking revenues to distributors.

If you ask the question I think you did how much of Chinese revenue is in guidance we really haven't gotten in the past we haven't broken out by countries but at a high level since we brought up the Chinese topic maybe we can see at a high level, at the high water mark we are selling about 1.6 million in revenues to the Chinese distributors, the two master importers and I feel like something between 300 and 800 is reasonable to expect this year.

It's just a question of when it really does turn on and historically since it’s been such a small piece of our business we haven't really worried about it. When we got down to looking at guidance and how it affected Q4 it really did make a big difference because you lost $400,000 of revenue in a quarter..

And obviously still turned in solid performance. Gross margin was a shade less than your 70.3% guidance, obviously more than making up for it on the OpEx, store OpEx growth.

Maybe talk through some of the puts and takes on both gross margin was that I don’t know, currency or mix or China and and the drivers of the lower OpEx, and again how that settles up perhaps for 2018?.

The gross margin was maybe 0.5% or so below what we were talking about previously on the previous call. The lower China sales actually helps the margin a little bit, low sales typically at a little bit lower margin than our sort of our U.S. and European sales.

Although we have some yearend clean up topics and we have some manufacturing inefficiencies, I will call it accounting stuff as sort of what we capitalize with the balance sheet, stayed up on the balance sheet, for a little bit longer than I thought I would last quarter and those are good guides coming off, so you're going to get some of that in Q1, you didn't get it in Q4, and you thought you would, so it's really a lot of the caught up in accounting sort of balance P&L interplay there, and then maybe some yearend cleanup as well.

Going forward, I think you're going to get a little bit of that good guide in Q1, and you can see our guidance of 71.5 for the year, in the year and in the Q1, you're definitely getting FX help but in Q4 versus our previous guidance FX really wasn't the topic but going forward FX is certainly a topic if rates stay sort of where they are in that 123 range or so, euro to dollar so you'll get some nice tailwind from the FX going forward, through the rest of the year if those rates stay..

And two last ones for me, just again maybe a sort of high level question to start with obviously there're lot of topics here, but when I think about your organic growth guidance of 7% you grew if I remember correctly 12% organically in '16, you're just -- you're growing 7% in '17 to your guiding to 7% in '18, but that's with -- '17 was with the China headwind, with [indiscernible] not performing optimally, without significant sales, forced expansion which is a whole other topic but wouldn't I -- just try to push out it but why wouldn't I view the 7% organic outlook for '18, as maybe thoughtfully and prudently conservative but as potentially conservative given all the other good things that are happening?.

So, yes, I would say the guidance is what it is Rick, and this is what we think, we put our pencil to paper, and so I wouldn't want to say it's optimistic or negative guidance it's just what we say so that is where we're at.

I will say if you look at it, we may have historically and consistently sold you guys a 10% reported sales growth rate that's in play this year, this year it's 7%, it maybe a little bit smaller than sort of historically as we talked about, with 100s of investors, we've broken it down to 10%, and 8% -- 8.3% is this odd number we keep coming back to but 8% is a better number.

And I would say that if you pull out China in '17 and '18, we keep coming back to the 8% number, and so it seems like a pretty standard guess by LeMaitre Vascular, but I wouldn’t characterize as particularly bearish or bullish..

And just last from me, obviously your cash continues to build, it's been about a year since your last deal, I forget who is running business development estimate, but perhaps that person could talk about M&A capacity and what's happening and again how we think about opportunities in '18?.

Yes, so it has been about 14 or 15 months, the good news is we've been integrating RestoreFlow and I think as everybody knows that's been going quite well for us, I think the revenues are 62% above the pre-acquisition levels, and so of course we're focused on doing the right deal rather than doing deals quickly but that being said, aside from focusing on integrations in the first half of the year, we've been back, me and my colleague Luke and other folks who all [indiscernible] the pavement, trying to identify the next acquisition, so I can really tell you is the pipeline, there' s a good number of targets in it, we continue to focus on the open vascular surgery purple vascular [Deltas] access, we like biologics but and we like non-biologics too and certainly with the bigger war chest cash of 41.7 as you pointed out I think that gives us greater optionality, so we've done 19 deals in 20 years and we're hunting for the next one and at some point you'll hear about it..

Our next question comes from Jason [Mills] with Canaccord Genuity. Your line is now open..

HI, this is actually Cecilia Furlong on for Jason, and congrats as well on a great quarter. I was wondering could you provide an update on your sales force leadership, both in the U.S. and non-U.S.

as well as sales force retention and hiring trends?.

You are actually talking to the worldwide VP of Sales right now as well as CEO, and the great news here is we've found a wonderful guy to run our Frankfurt office and he starts on March 1st, so we're about I don't know 10 days away or so from me not being in charge over in Frankfurt.

I spent the last seven months running over there, one week a month to sort of just feel the organization, and understand what they needed. On the U.S. side we've been a little bit slower, it's a little bit easier for me to manage the U.S.

side, since I've seven folks that I've been working with for a long time in and out of VPs of Sales, and we continue to search for that for the right man or woman on that side.

In terms of turnover we've an interesting thing in 2017, you asked about turnover, in Europe we had a little bit more turnover largely central Europe which we're going to call Germany, Switzerland, Austria, we had three or four churns there, that's a little greater than normal, and in the U.S.

we had a bit of better run than we usually have and in 2017 four reps left us voluntarily, I would say the normal number in the American -- North American sales force excuse me, is about six or nine and this year we only had four, something about the rising stock price, the better comp plan and maybe the better portfolio devices with that RestoreFlow acquisition kept the folks around a little bit longer in the U.S.

than they normally stay. .

And then just for a follow-up, could you provide some color on the growth trends you're seeing, just the cost to your Biologics portfolio versus the rest of your product bag, how do you see this mix playing out in 2018 versus 2017? As well as the impact on margins?.

Sure, and you remember of course we don’t guide based on individual products so maybe I go back into '17 and try to draw some trends, and you'll have to figure out what you want to do with those growth rates.

The XenoSure grew 20% on a reported basis I think Omniflow grew 18% on a reported basis if I am getting that right, RestoreFlow had a high growth rate but it didn’t have anything to comp against but we don’t have a comp number for you.

So, it was a very exciting year for RestoreFlow and then profile upward of 15% growth rate in the quarter -- excuse me, in the year. Dave has got a better number..

51%..

51% sorry, transposed that facility. But in general, you think that LMAT’s biologic portfolio continues to plough ahead at a faster rate than its non-biologic portfolio. .

[Operator Instructions]. Our next question comes from Raymond Myers with Benchmark. Your line is now open..

Thank you.

And usually you report the biologics as a percent of total sales, are you prepared to do that this quarter?.

Yes, Dave can take care of that Ray..

Ray, yes. So, the biologics in Q4 were 35% of total sales..

Let’s talk a bit about your plans for hiring reps, now that you are about to hire a European sales leader and you are going to be able to focus all your attention on the US, will you be hiring more sales reps in 2018?.

Yes, Ray in fact I am glad you asked that question. So, on the official feature looks like what we have 90 sales reps. Interestingly enough we have 102 requisitions out there right this second. Most of them will kind of fill over three to eight months.

I feel as though the general trend is upwards here, I am sort of able to re-circulate a little bit of the money that I saved off the VPs of Sales in the two geographies as well as remember I didn’t take my salary for sort of half of last year.

So, let’s get a little bit more generous with the rep portfolio, and that growth is taking place on both sides of the Atlantic, not necessarily in Asia..

So that’s 102 suggest that you will get to 102 reps by the end of this year, is that what you mean by that?.

No, it means we have 102 spots that are being offered, with reps as we talked about with Cecilia, you are getting them coming and going based on voluntary quits as opposed to a forced termination. And so even though you are spot 102 it feels a little bit more like it’s going to be lower than that.

I don’t really have a great grip on what lower means but for fun we could say 96 to 99 will be sort where me might go or we might open up some more reps. One of the things about the FX rate that you are seeing happening is that we are having a nice uplift this year from FX. We already called out we have a 7% organic number but a 10% reported.

That entire delta, if I am not mistaken is FX, and inside of that there might be an opportunity to take a little bit away as well as a little bit Trump tax cut, and use that to build the sale force. There’s a little bit more on both sides of the Atlantic..

Great.

What is stock comp in the fourth quarter?.

Stock comp in the quarter about $500,000..

You are building out a clean room in Burlington, how is that progressing?.

Yes, so we built out two clean rooms in Burlington actually really.

So our main clean room we expanded last year and added decent number of square footage to that space just to give us more room, obviously as we expand volume but we also built a biologic clean room, so a clean room dedicated solely to our biologic products XenoSure obviously the first product line, to go in there, more room for the XenoSure folks but also a larger footprint gives them a chance to build a better process around what they're doing with XenoSure and as the units ramp and combine with the better process hopefully we can get better costing on those XenoSure units as they come out of the new clean room over time.

We're also selling ProCol as you know we've previously been purchasing that product from the seller, of the device to us and now we're manufacturing it ourselves although not approved and not validated to do that yet but we're in the process of striving for that so we'll get that over the next I don't know maybe six months or so, so we'll see how that goes, but -- so two biologic products going into the clean room, and two separate clean rooms, one expanded and one new..

And kind of lastly general question, maybe for George, you've shown really good operating expense control recently, is that part of the program of cost cutting, what should we expect for expense control in the future, should we get used to this type of expense control or is this a temporary?.

Last year you had these three things, these discreet items, the two VPs and myself we've talked about that once already but we also had in the background, this thing, the cost cutting effort that started in May or June and I think that helped out a little bit as well as you talked about the gross number of reps being 90, in Q4 versus 96 the year before, so all those things kind of came together.

I would say that's a special quarter, I don't feel like we can be that type for all of next year and I think our budget, you can figure out what our op expenses are supposed to be based on all these numbers we've given you, but I feel like it's not going to be tight next year but in general I perceive LeMaitre to be a really tight company and that's why we're able to guide 23% op margin, next year without sort of the last four years we haven't really had a big up drift in our gross margin, and so we've been able to get this op leverage from about 15% op margin in 2015, I think [indiscernible] to 23% in 2018, and that's been about low single-digit sales growth and high single-digit op expense growth, a little bit of operating leverage there is what I'd say..

Last question I am not sure that you gave us a sense of how soon we should start to expect revenues again in China?.

So I think what I was trying to say we're not exactly about countries but I did call out China so it makes sense you guys would want to know that, and it feels to me like we should expect the first shipment to sub dealers in March or April of this year and it should build to something this year and I think I gave a range on this call about 300 to 800ish and it's really hard to tell how this thing is going to take off, on a $110 million business I wouldn’t worry too much about whether I land at 300 or 800 but something like that..

Our next question comes from Mike [indiscernible] Research. Your line is now open..

So, I guess one question I have and related to the dividend increase it was obviously it's great for shareholders but I do wonder if it sort of also says something about the valuation you guys are seeing out there in terms of M&A I don't know if George or David want to talk about that little bit..

Maybe I'd take a shot at it from a sort of strategic perspective and then Dave takes a shot at it from acquisitions. We try as hard as we can always to flash to everyone we talk to. We love dividends, we love doing M&A, we've done 19 deals in 20 years as Dave mentioned before.

You know as a principal owner here I feel strongly that a great company exhibits strong dividend growth so I'm not letting go of that at all and I'm pressing even harder, the more we get leveraged you see the tax reform, we sort of got tax reform a year early in some funny way here because of the stock option exercises, all these things were going on in 2017 gave us an effective tax rate of 19% and we only have an effective tax rate of 25% next year due to the Trump tax changes so those two things enable one to be a little bit more aggressive with the dividend strategy but I always want to say I got plenty of internal CapEx type investment and Dave can tell you again about all the wonderful acquisition opportunities we have..

Right, I mean it's one of those nice problems to have where we have so much cash coming in that we're increasing the dividend and yet the war chest continues to build and so Mike to address your question about valuations of course when I would say as a rule we generally don't participate in auctions.

Valuations I find are very situation dependent but I think there is no question that as we see the public market valuations high with our peer group and then a lot of deals like Philips, Spectranetics and Beckton Bard at six and seven times sales or [indiscernible] Argon, in the four times sales range.

Sometimes that translates over to certain sellers and then you know with other sellers it doesn't so maybe at the margin we see valuations up a little bit but again it’s very situational and some deals I look at they're public market seems to be not be affecting at all so sort of hard to exactly connect the dots..

Okay, what’s your confidence level you guys do a deal on '18..

I mean I generally don't talk about whether we'll do a deal in a specific period of time or not, I say you know if you look at the history I know you know it well we've done about a deal a year but sometimes I've gone a year two or three without a deal and then I think one year we did four and so and part of the reason it’s difficult to predict is we often we don't know if the deal's going to get done until the last minute and so I would say not much has changed it's the same team maybe the team has even broadened, bank balance is higher so those are good things but we have to find willing sellers of strategically appropriate assets and so we're just outlooking as usual.

.

Maybe a little Mike, maybe an additional color on this is so you're pointing out hey, I haven't done a deal in 16 months when is the next one and we're not saying when it is, but I will say we took a breather last year.

I think you remember we had some recalls in the beginning of 2017 end of 2016 that we weren't too proud of and so we took a little bit of a breather and got our house in order, we worked real hard on quality, we've got a fantastic complaint rate starting up in 2018 particularly in Q1 obviously and so we feel like we've largely-- you never really do at a medical device company finally but largely put our quality issues behind us.

And I think Dave is forced to wait a little bit when stuff like that is going on our business. Because he knows it’s so important to get great quality. I feel like we’re there now and that sort of further releasing him to go up and do what he needs to do. .

Okay, great. So, speaking of capital allocation, have you guys been active at all in the XenoSure.

I think there is share repurchase, have you haven’t done anything with that or not to this point?.

We have share repurchase authorized for I think $7.5 million and we have not repurchased any shares yet..

And just one another quick one. I didn’t quite catch it, I was reading something really quick and then you guys started giving numbers.

The XenoSure number for the -- was it 20% for the year or was it 20% for the quarter, the comp I didn’t catch that?.

20% for the year..

Was XenoSure up, I know we’re hitting some difficult comps.

But was XenoSure up in the fourth quarter or was it down?.

Yes. It was up, I think 16%..

Our next question comes from Jim Sidoti with Sidoti & Company. Your line is now open. .

Just quick question on the sales and marketing in general administration expense in the quarter. Sales were up relative to the third quarter; those two numbers are down.

Is that strictly due to the fact you didn’t have a sales manager and that George wasn’t taking a salary or was already other one-times in there?.

So sequentially Q3 to Q4 OpEx is that we are ramping..

Right..

So, we had all about 500 charges in Q3 non-cash one-time special item for stock based, for departing employees that we did have in Q4. And that’s really in your big delta between the two quarters. There were some other puts and takes as well, sales reps count at 90 so a little bit on the low size of commission and related expense is down.

But really if you want to flux from Q3 to Q4 that’s kind of your answer. .

Okay.

And I’m sorry, if you addressed this already, but you said you have 90 reps now, sorry, 90 reps now and what is your target for 2018?.

I feel like we talk about 96 to 99, but I feel very comfortable to doing a little bit or little bit less based on comings and goings of reps..

Okay. And then Dave, you better do a deal soon. People need to remember your name..

All right. Point taken..

Ladies and gentlemen, that conclude today’s conference. I’d like to thank you for your participation and you may now disconnect. Have a great..