Welcome to the LeMaitre Vascular Q3 2018 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, Michelle. Good morning, and thank you for joining us on our Q3 2018 preliminary results conference call. Particularly for the folks in the Pacific Time zone, we apologize for the early call but we felt some amount of discussion would be helpful to go with last night's press release. .

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 will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. 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 5, 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 and EBITDA. A reconciliation of GAAP to non-GAAP measures 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. On this morning's call, I'd like to describe the challenges that we experienced this summer. I'll also highlight a few of the company's key assets and projects, which should lay the foundation for recovery.

JJ will then walk us through some Q3 financial highlights and further enumerate our Q4 and 2019 business opportunities, and then Dave will discuss the recently completed acquisition. .

Q3 was a frustrating and humbling quarter, and my often-stated 10/20 aspiration for our business is now incongruous with our 2018 results. I know we need to do much better. We owe our shareholders higher organic sales growth and growing profits. .

As you may have seen in the press release, there was a $1.8 million delta between what we thought would happen in Q3 sales-wise and what actually happened. The miss was primarily due to a decline in year-over-year allograft sales, weakness in European valvulotome sales and lower export sales to our international distributors.

Our product return in China, Hurricane Florence, and the strengthening U.S. dollar also contributed, though to a lesser extent. The 3 larger issues of allografts, valvulotomes and export sales deserve more explanation. .

Q2 2018 was a record quarter of $1.9 million in allograft sales, a 24% year-over-year increase. And frankly, we thought we had some momentum. The allograft -- the RFA allograft company, which we acquired in November 2016, had a concentrated account list, and several of the largest customers were ordering through independent agents or distributors.

But LeMaitre's long-standing model has been to eliminate the middleman, and sometimes these transitions have consequences. This summer, we saw several large accounts decide to follow their independent distributors to other tissue providers, rather than work with LeMaitre's dedicated sales reps.

And while we've lost several of these pre-acquisition accounts, our 55 North American sales reps have opened up new accounts, albeit smaller ones, at an even faster clip. At the acquisition, we had 62 RFA accounts, and we now have 110. .

I believe we possess certain key assets in the cryopreserved vein space. Our North American sales force is almost exactly the same size as CryoLife's, but our reps are able to focus exclusively on vascular surgeons, whereas their reps must visit cardiac and vascular surgeons. We also price our tissues about 15% lower than the competitor. .

I should also note that we've struggled to source enough allograft tissues. Perhaps, we did not move fast enough after the acquisition to match our tissue-sourcing capabilities to our large direct sales force. Some of our regional sales managers even report that their reps had cut back on allograft marketing until they see sufficient product.

But this supply problem seems fixable, and I will continue to press the organization to find a solution. We've added 5 tissue-sourcing and processing folks at our RFA facility in Chicago, and we now work with 22 tissue recovery centers versus 10 on the day we acquired the company.

We've established a reputation as the no-backorder company in all our other product categories. Someday, we need to be the no-backorder allograft company as well. .

With regard to valvulotomes, Q3 2018 sales were down 3% worldwide. More specifically, we experienced lower order volumes in several of our European subsidiaries. After talking to our local sales managers, it seems that record Q2 valvulotome sales and various unrelated, non-systemic issues were to blame.

There are some small stories to acknowledge, but no specific competitor has emerged and no sea change in surgical practice. Valvulotomes have been a stable business over the years, and 4% year-to-date worldwide sales growth for the category suggests that a reversion of the mean is likely. .

And finally, our export business was down 36% in Q3 2018 versus the year-earlier period. This is unexpected because summer is usually a very busy ordering quarter for international distributors. The slowdown is possibly in response to weakening currencies, like the Turkish lira and the Russian ruble, and is possibly just an order pattern issue.

We've recently hired a new export manager in our Frankfurt office as well as a head of sales for Asia-Pac Rim in our newly opened Singapore office..

Of these 3 issues, I would say the area where we have the most work to do and the area where I can't promise a quick fix is our allograft tissue business. This is a fantastic acquisition, and we're thrilled with the technology, but we're up against a solid competitor who has been at this for years.

As for our export business in valvulotomes, I do think we might see a fairly quick rebound. .

At a high level, I remain confident in the quality, diversity and profitability of the company we built. LeMaitre Vascular has been assembled like a vascular mutual fund of 15 product lines in 21 countries. Maybe this is why we've been able to hit our guidance 2/3 of the time.

So despite the disappointing Q3, I expect the various businesses inside LeMaitre will perform like a diversified portfolio. .

We've also recently grown our sales force to 106 reps, and I believe their reach and power will be felt soon. And we continue to produce cash at a terrific rate, and most of this will find its way into vascular acquisitions and increasing dividends..

So I look forward to this coming Monday, when I can put Q3 2018 in the rearview mirror and begin to build Q4 sales and earnings. The stakes are high for me. I currently own 70% of the LeMaitre shares I've ever owned, and I currently own 16% of the company. I realize that rebuilding your confidence will take quarters, not months. .

With that, I'll turn it over to JJ. .

Thanks, George. While global sales were a disappointment in the quarter, many other areas of our business performed well. The insurance sales in Q3 were $5.7 million and posted a third consecutive quarter of 7% organic growth. Over the next 3 or 4 quarters, we expect to launch [ XenoPlus ], [ XenoDura ] and XenoSure with no freezing indicators.

XenoPlus will be a thicker patch in order to compete more effectively with one of our competitors. The dura indication on [ XenoDura ] will allow us to access the spine and neuro markets, while XenoSure with no freezing indicators is a convenient item, which should also reduce packaging costs.

In addition, we recently obtained approval for XenoSure in Australia. .

The corporate gross margin in Q3 was 71.4%, up 60 basis points over the prior year period. Average selling price increases, manufacturing efficiencies and lower RestoreFlow and export sales were the main contributors. .

Operating expenses in Q3 2018 were $12.6 million, a 1% increase over the prior year period. While we increased year-over-year sales rep headcount by 17, from 89 to 106, we still managed to keep expenses in check. The operating margin in Q3 was 19% versus 20% last year.

Our Q3 2018 operating margin could have been higher have we not divested the Reddick Catheter line, which carried $2.5 million in annual gross profit. .

Cash continues to be a bright spot at LeMaitre. We ended Q3 with $45.6 million, an increase of $3.7 million, excluding the $11 million paid for the Clot Management Business acquisition. .

Turning to guidance. We are projecting an 8% increase in sequential sales to $26 million in Q4 2018. This should result in a 20% operating margin. More broadly, full year 2018 guidance implies that sales will grow 3% organically to $103.2 million, and our operating income will increase 25% to $26.1 million.

Our guidance implies EPS growth of 19% for the full year 2018. .

With that, I'll turn the call over to Dave Roberts for some remarks on the recent acquisition. .

Thanks, JJ. On September 20, we acquired the Clot Management Business of Applied Medical for $14.2 million, $7 million (sic) [ $11 million ] was paid at closing and $3.2 million will be paid in 2 post-closing installments.

The acquired business includes Syntel embolectomy and thrombectomy catheters, Python over-the-wire embolectomy catheters and Latis graft cleaning catheters and irrigation catheters. .

Sales of the acquired business during the latest 12-month period were $3.4 million. We expect the acquired business to add $500,000 to $600,000 in Q4 2018 and to have no impact on Q4 2018 operating income due to short-term channel transition costs.

The acquisition complements our current line of embolectomy catheters by adding a latex-free over-the-wire product to our bag. In addition, the acquired product lines are sold to over 1,000 customers, which could represent a cross-selling opportunity for us over time. .

With that, I'll turn the call over to Michelle for questions. .

[Operator Instructions] Our first question comes from Rick Wise of Stifel. .

It's Drew Ranieri on for Rick this morning. Just to start, I know you're not ready to discuss 2019 guidance.

But from just from a high-level perspective, can you give some puts and takes that we should be thinking about as we head into next year, just given that the past few quarters it seems like it's been maybe a series of unfortunate and transient events? Or should we be thinking some of these headwinds? I think you mentioned the allografts might be more persistent.

And how should we contemplate them? And then just -- I'll add this as well.

But just as we go into 2019, how confident are you that the organic growth can rebound to deliver on your 10% reported top line growth aspirations given that this new acquisition might add about 3 points of growth?.

Okay. So Drew, this is George. Thank you very much for the questions -- good set of questions. And a lot of the questions, you're searching for 2019 guidance, and I don't think we're ready to do that. And so I think we've given you Q4 guidance, and that's where we're going to stop today.

As it relates to 10/20 concept, which you just brought up, I feel as though in the press release last night and in my prepared remarks this morning, I feel like we're saying, "Hey, that doesn't make sense right now. We shouldn't be out there saying 10/20." So at this call, I feel like we're lifting away from that.

It's not to say it won't ever come back again. I do feel like with that cash hoard of $45 million, I feel like the winds at your back in terms of trying to chase down 10% sales growth in the future. But for now, we're not going with the 10/20, and you're hearing that fairly clear in the press release. .

And Drew, I might add on -- you were asking for some puts and takes and you were talking about issues that happened earlier in the year. And you remember, in Q1, we were talking about Germany and China. And Germany's had a nice recovery.

It was down in Q1, and now it's up in Q3, and it's recovered sort of through its normal growth rates, "if you will." And so that's been a nice story in China.

You know we've been rationalizing that channel, and so maybe we're going to get some more reliable answers out of China and maybe be able to scale that a little bit as we increase the number of subdistributors in lieu of those 2 master distributors.

And then some other puts there, sort of our -- that export topic in the valvulotome topic that George talked about for Q3, maybe those are 2 that could repair sort of more quickly, if you will. The allograft thing would be a take maybe, maybe that doesn't repair as quickly.

But then there are some other topics that we talked about in our preprepared remarks, the Pac Rim VP that we hired, maybe we're putting more resources towards the Pacific Rim area. We're only $6 million in sales and obviously a very large geography.

And next, we hired an export manager to replace our old export manager, so there might be some upside there. And then those XenoSure R&D topics as well. So there might be some nice sort of topics there for you going forward in terms of 2019, without putting numbers around that. .

Got it. And then just a touch on XenoSure. Just looking at growth over the past 4 quarters, I mean it's decelerated from 20% down to 6%. And I think this was -- this quarter was of -- more of the easy comp.

I appreciate that it's become a bigger piece of the portfolio, but how should we think about growth over the next couple of quarters even? I mean, can you return this product back to double-digit growth given the new product launches and the Australia approval?.

Drew, it's George. Just to recap some of the things you said in there, I do feel like we've had 3 straight quarters of 7% organic growth. So regardless of the ups and downs of the quarters, it has kind of stabilized at that level. But going forward, I think we've been pretty consistent here.

We'll tell you guys about product lines going backwards, but we're not going to try to slice out what happens next in terms of each product line. So we don't guide on products. It is all baked into that organic growth of 1% for Q4 and the sequential growth of 8% from Q3 to Q4. There's a lot going on with XenoSure.

I actually felt like -- as J and Dave and I made the rounds for one-on-ones over the last, I don't know, 6 months or so, this is clearly a major topic. And I kept finding myself coming back to -- I think it's important what card LeMaitre flips over at the end of Q3.

And we're flipping over a 7% organic growth card, and I think that's the best data that you have. And combined with Q2 being 7% and Q1 being 7%, I think you're starting to feel your way towards an answer there. But I don't feel like we know enough to give you numbers going forward, and it seems folly to do that. We've never done that before. .

Got it. And then just last question for me, just more of housekeeping. Can you talk about what.

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these numbers as quickly as we could because we felt we owed you these numbers fairly quickly, given where they came in. So we haven't studied that topic at all.

We'll put it in the 10-Q, and let you know through the 10-Q, okay?.

Our next question comes from Jason Mills of Canaccord Genuity. .

Can you hear me okay?.

Yes. .

Super. So I just wanted to follow up a little bit, George, on XenoSure. I think it's an important topic. You mentioned making the rounds, the one-on-ones, LeMaitre comes up in my meetings, XenoSure, and biologics in general come up more than anything else.

So maybe if you don't want to talk specifically about the future growth for XenoSure, what's the future look like for your business on the biologics side versus maybe the other products that you have or are considering in M&A?.

Okay. So we had a tough quarter in Q3 on the biologics in terms of ex XenoSure. So the surprise and the irony of the Q3 topic is it wasn't really about XenoSure. It was about other stuff. And so ProCol, you're hearing this now for the first time, Jason, as well as RestoreFlow, which has been a key piece of this call, those 2 products struggled in Q3.

And I think it chipped away a little bit at the biologic hypothesis for us, except XenoSure did better than I think. I think a lot of people were very nervous about that number. Again, as we made the rounds, people were like, "Oh my gosh, what's it going to be in Q3?" And so it felt like a not-so-great biological quarter.

In general, I think we're still very optimistic that biologics for all the reasons that we've given you guys in the last 10 calls or 15 calls, I feel comfortable that biologics is still the direction to go in, but we didn't have a quarter -- a great quarter to write home about just now.

Maybe Dave can add some color here regarding acquisitions, which is part of your question. .

Sure. Yes, we are still looking, of course, at biologics as acquisition targets. As you saw from Applied, we're also looking at non-biologics. We do like the biologics a lot. We think over the long haul, it's a good space to be in. There are other products in the biologic space we could acquire, like biologic grafts and other types of patches.

So I would say we continue to look hard in that space, but not exclusively. You could easily hear of non-biologic products being acquired in the months or years ahead. .

I guess just a follow-up on that. Biologics, tell me if I'm wrong, but they seem to tend to have a more naturally higher organic growth profile on a go-forward basis as things are moving -- seemingly moving somewhat in that direction in your field.

So are there -- I guess, the question is, are there -- it would stand to reason that you would see more competition for those assets. They may cost more to acquire, number one. And number two, once you have them in your portfolio, there might be other competitive products that make it more difficult to compete in the marketplace.

Maybe talk a little bit about the -- both of those competitive landscapes. Think of the landscape for buying these assets, and once you get them, the growth and the number of competitors you might have in biologics. And I'll just throw in my last one, George.

You mentioned some of the issues with respect to accounts and the acquisition you made in 2016. And as you integrate those business -- those accounts to your direct sales force, which makes complete sense to me, why else have a direct sales force if you're not going to use them? But you had some issues.

And I'm wondering if we should anticipate the potential for similar issues with this most recent acquisition or those you might make in the near future?.

Okay. Why don't I take the first part of that, Jason? First of all, I generally agree with your supposition. Obviously, biologics have performed well for us post acquisition when we put them in our bag.

We do see surgeons embracing biologics for reasons we've discussed on previous calls, having to do with preventing infection or ability to fight infection. And infection is just an issue that's not going away in hospitals. So we definitely believe that biologics are a good segment for us to be in.

Inside of that, in terms of competition, I would say, on the patch side, we definitely have felt more competition on the patch side, the biologic patch side. I think we've listed some of the companies before. So there is competition in this space. I do sense there are also targets for us to look at and acquire that offer different technologies.

Could we pay more for those because of the traits of the products we're acquiring? Sure, it's possible. It's -- each acquisition is so specific to the deal itself that it's hard to generalize, but I do think it's possible we could pay more. On the graft side, I have to say that I haven't seen a larger number of graft targets out there.

There are targets out there, and we've been focused on them over time. So we will continue to pursue those. And so they are definitely targets for us, but like I said earlier, we will look -- we're looking at the synthetic products as well. And the second part of your question, I'll take that. .

Sure. .

It's sort of more about integration of the Applied Medical acquisition will be -- and Jason, to rephrase your question, will it be as difficult to integrate Applied Medical as it was RestoreFlow in terms of this customer transition issue? And my short answer, Jason, is no, probably not.

And the reason is, is that when we buy products from smaller companies, small entrepreneurs that were using exclusively a patchwork of independent agents and distributors, they really relied on those people, and you really do get into a scrum with the distributor, not the company that you bought out, but with the distributor, over who owns that revenue.

You see this playing out over and over and over again when we buy these small companies, like the Australian company and now RestoreFlow.

When you buy -- when you do a carve-out like Dave just did with the Applied Medical Clot Management Business, when you do a carve-out from what I'm going to call a professionally well-developed outfit, Applied Medical is many times larger than LeMaitre Vascular.

They've got direct operations in Australia, direct operations in Canada, Holland, you name it.

And all -- in most instances with this acquisition and ones that we do as carve-outs, you're just switching from their direct sales force in Australia to our direct sales force in Australia and Applied Medical's Australian General Manager, as an example, knows that he's supposed to give the business over to us. There's no fight.

They just hand over the account list. That's what Dave paid the money, the 11 -- the $14 million for. So in short answer, I don't think it'll be as bad, but there are always topics inside of every single one of these acquisitions. They're never clean, and we use this word.

[Audio Gap].

conference call word, but there's a lot of fireworks that go on -- that go off after you do an acquisition. And certainly, with Applied Medical in 6 to 12 months, you and I will be talking about some small fireworks that we weren't expecting. This is part of the acquisition business that we're in. .

And maybe I just add one interesting statistic that, at RestoreFlow, the largest hospital customer was around $0.5 million. And with Applied, the largest hospital customer's around $60,000. So it's 1/9 the size.

So the large distributor transitions, as George mentioned, but at the hospital level, that's not nearly the concentration that we saw with RestoreFlow. .

Our next question comes from Joe Munda of First Analysis. .

Can you hear me okay?.

Perfect. .

So first off, George, I want to start with your comments regarding sourcing for RestoreFlow.

Can you walk us through, I guess, the process of how bringing on new suppliers, the time lines there, and just I guess some color on the ability to bring on more suppliers of tissue?.

Sure. Okay. So it's a fairly complicated story. We need recovery centers, which is where we get the tissue from. We've done a great job of -- there's 2 sides of this, Joe. You need to have a recovery center out there when obviously the person deceases, and they're taking the organs out of their body.

So we've gone from having 10 of those at the acquisition time to now 22 of those. I feel like we've done a pretty darn good job of that. That's actually a whole little subspecialist of -- we've hired a couple of "sales reps" that go out there, and they market.

The fact that LeMaitre wants to acquire these tissues to give this gift from the deceased to the new recipient, right? That's one part of the puzzle. The other part of the puzzle, which I think -- and I feel like we've sort of 2/3 licked that topic.

The other part of the topic, which I don't feel like we've gotten fully our hands around is that once it gets into our hands, into the building in Chicago, it still needs -- we still need to go back and do a lot of checking on the donor to make sure they didn't have any kind of diseases and to figure out how the deceased -- the death certificates are valid, things like that.

So there's getting into the building, and then it's processing inside the building. And then it's releasing it, giving what they call donor charts, making sure the donor checks out, so the gift of the vein from the deceased to the person that's going into, it's going to be a good gift and not sort of ruined by the person's history, if you will.

And so I feel like that second side, we're not quite getting right now. And I feel like the first side, we've gotten. And the first side feels like, we've "got that" about 3 or 4 months ago. And so the stuff is still flowing through. It's not a quick process. But I think, eventually, LeMaitre will get its hands around this topic. .

Okay. That's helpful. And then I guess, on the flip side, you talked about the distributors -- I'm sorry, some hospital customers going the way of their distributors.

And I'm curious if the distributors were distributing your product, and now are they distributing somebody else's product? A competitor, you had mentioned CryoLife as citing an example, but are there competing products beyond CryoLife that maybe these -- that these distributors picked up and are now repping and competing against you guys in the marketplace?.

Yes. So the market is fairly simple. It's CryoLife, as you mentioned. They're the big guy, sort of 80% market share. It's us with 10%, then LifeNet with 10%-ish. And I'm giving you the broad strokes here. And the answer is yes. And I would say 2/3 of the answer to your question is they went to LifeNet, which does use independent distributors.

I don't believe CryoLife uses independent distributors. .

Okay. That's helpful.

And then George or JJ, what was biologics as a percentage -- the whole business as a percentage of revenue in the quarter?.

We will have to get back to you on that, Joe. Don't have it at hand. Sorry. .

Okay. And then, just 2 more real quick, George. You guys discussed some new and interesting products on the XenoSure line. And maybe give us a little bit more color on the opportunities there. You talked about plus, dura and non-freezing. And I guess, maybe educate us on the benefits to all 3 real quick here and why these 3 matter in the marketplace. .

Sure. So maybe I talk about the products, and then Dave has better handle on market sizes and things like that. So our main competitor in this business, everyone knows, is Baxter, and they have this Vascu-Guard product.

They also have what's called Dura-Guard, Joe, and it's the same product except that it has an indication from the FDA to be used on the dura matter in the brain and also in spinal surgery. We're applying for that with the FDA, that indication to now match and to get it parity with Baxter's indications, both vascular and dura.

So there is one topic, and that's whenever the FDA comes back and says yes. And it feels to me like it's 3 or 4 quarters from now, something like that, whatever we said in the transcript. And then there's also a concept called no freezing. This is not no-freezing indicator. This is not really a commercial issue.

This is a money-saving issue, which is we're doing testing to prove that it's okay. That our product can get frozen or not frozen. And so the doctors' experience will be a little bit better at the doctors' level because they won't get a product. And the indicator, it's like a turkey baster, Joe.

The indicator pops out and says, "Hey, this product froze for 10 minutes." And therefore, they don't want to use it. So we're working on getting rid of that thing. So there's Dura-guard. And then the final thing is sort of more in the short term is the -- what we used to call fat boy internally, and it's XenoSure Plus. And it's again back to Baxter.

When we took all of the accounts 2.5 years ago, everyone remembers this famous story, they went into backorder. We make out all this free business. A lot of those customers had then walked back to Baxter because they felt as though their product -- sorry, they felt as though LeMaitre's product was too thin.

But of course, we all know a cow is a cow is a cow. It's the same product. But the way they process theirs, Baxter, made it feel a little thicker to the doctor when he was implanting or she was implanting it.

And therefore, we've gone back and made separate catalog numbers to make our -- different set of catalog numbers thicker, and we're going to call it XenoSure Plus. And that's the -- those are the 3 thrusts that we talked about here. .

And Joe, on the size of the market of the biological patch market, it's over $100 million. It's about $110 million or maybe $120 million. 60% of those patches are larger patches, which, let's say, would be used more often in cardiac surgery, whereas 40% of the patches are smaller patches for the peripheral vascular applications.

And on the percent of sales of biologics, this is answering a previous question, 36.4% in the quarter. .

And George, one more, if I may. In regards to the sales force, you said you guys ended the quarter 106 reps. It seems to be a little bit higher than I think -- if I recall correctly, previous maybe getting it up to 105.

I guess, can you talk about a little bit what you're seeing as far as the opportunity by adding reps in the marketplace given what's going on right now?.

Sure. So I mean, I think we've always been saying we're trying to get into some field goal like 105 to 110. So 106 seems to make a lot of sense to me now, and we still have some more requisitions out there being hired. But think of it as a 105 to 110 field goal. That hasn't change that much.

In terms of the opportunities, the company -- we are our direct sales force. That's who we are. That's what we do, and then we buy products and we put them through there. So in terms of opportunities, I don't know if you'd talked about how easy or how hard it is to hire. I haven't found it to be too hard to hire. It seems to be coming at a normal pace.

Maybe it's a little bit slow in Europe for some reason. I don't quite understand that, but the hiring processes are taking a little bit longer over there. But in the U.S., it's sort of been going according to plan and how the regional managers have always been hiring these folks. .

Our next question comes from Mike Petusky of Barrington Research. .

So I guess, George, one thing that I've thought is really challenging for you guys and I know you're kind of putting aside the 10/20 for now, but just the idea of kind of 4% unit volume growth, 4% pricing on a consistent basis over the long term just always seemed tough, although you guys were often sort of pulling that off.

But law of large numbers to me would seem to make that tougher over the long term. What doesn't seem super ambitious in a normal market would be that the M&A piece, you would be able to -- which you guys have always kind of called about 2%, would be able to either be met or even surpass.

And I guess, as you think about the future, is it likely that maybe M&A growth is just a bigger part of what drives the top line over time? I'm not saying over the next 6 months, 12 months.

But as you look over the next 3 to 5 years, is it likely M&A just becomes a bigger part of the top line growth?.

Okay. So there's a lot of suppositions and questions inside there, but I'd like to try to get at some and then maybe hand it over to Dave. It's a great question, and we get this a lot in our one-on-ones as well.

I kind of agree with you that -- and if you look on the slide in our presentation that talks about the price hikes over the last 10 years -- 5 years, excuse me, 5 to 4 to 3, and maybe that's a little bit to do with ObamaCare, maybe that's a little bit to do with us becoming more international. But there's no question. It's gotten a little bit harder.

I also think that, to build a great business in the long run, I'm not so sure as much now that it's based on price hikes. And I think you're seeing me respond to that with this massive enlargement, this 19% enlargement of the sales force.

So I do agree with you that in the future, maybe pricing is less a component of our growth rate, and maybe good old-fashioned unit growth is a little bit more where we're trying to get to. I think you constantly see me doing this as we open that more where we're trying to get to.

I think you'd constantly see me doing this as we open up the Singapore office, as we build out the sales force. We go to China. We go direct in Australia. You're seeing me constantly searching for unit growth around the world. And so I think that's an important component.

As it relates to M&A, maybe I'd toss that over to Dave, and he kind of gets it -- the stuff inside to your question on that. Great question, and it's really -- it's very topical. .

Thanks. Thanks, George. And Mike, thanks for the question.

So on the topic of the size of acquisitions and targets, certainly, George and JJ and I, when we meet with the buy side, we -- a lot of folks do ask us, "Hey, when are you going to do a larger acquisition?" And I can tell you, in terms of targets we're looking at, the smallest ones tend to be around $3 million.

The largest ones are over $10 million, maybe they're $15 million or in that range. So we are looking at larger acquisitions as well. I'd say on the whole, there aren't quite as many of those. It's more important for us, of course, to do the right acquisition than a large acquisition.

So we're always focused on our key criteria, products used by vascular surgeons and the niche markets. But I'd also say that as the company's cash balance has grown and our cash-generation capability has grown, which it really has over the last couple few years.

That has -- and our EBITDA generation, that has opened up the possibility to larger acquisitions that really wasn't available for us -- to us before. So I would say, yes, we are looking larger, although sometimes to get $7 million in revenue. Instead of buying a single $7 million target, which would be better, you could buy 2 $3.5 million targets.

So we're not averse to that, and we are looking bigger, but we're always, of course, just focused on what we think will perform best in the bag over the long term. .

Okay. Great. That's really helpful. A couple for JJ, real quick. JJ, tax rate obviously trailed behind I think what -- at least we were modeling it. And I just -- do you have any thoughts on tax rate? It might at longer term come in a little bit lower than what you had initial -- I know a lot of people are still sort of finding their way on this.

Do you have any commentary around tax rate longer term?.

Yes, Mike. Well, in the quarter, actually it came in below what we were guiding. I think we came in around 9% effective tax rate, and we were guiding 25%, and it was largely driven by stock option exercises of employees. So this is sort of a good answer there.

I would say our normalized, under the new regime, long-term effective tax rate is in the 24%, 25% range. So you can think about that sort of longer-term directionally, but obviously influenced by a number of factors, not the least of which is stock option exercises. So I think it's been a good answer for us.

And then last year, we had some oddities in the quarters. One quarter was a 0 and one quarter was in the 30% range. So odd comps year-over-year, but I think nice answer in the most recent quarter and then sort of a stabilization number going forward as a base case. .

Okay. And then just last quick housekeeping, and this goes to cash flow.

Do you guys have the stock comp and CapEx for the quarter by any chance?.

CapEx was around 650k. Stock comp, I'd have to get back to you on that exact number. .

Our next question comes from Jim Sidoti of Sidoti & Company. .

Can you hear me?.

Yes. .

Okay.

Can you describe how large the Applied Medical distribution was for the products you acquired? And did they use any independent distributors? Or was it all direct?.

Sure. So the business was, as you know, about $3.4 million in revenue, and about 1/3 of that went through distributors, Jim. So about a little over $1 million. .

Okay. And so I assume there's some inventory in the channels, and that's why sales in the fourth quarter is a little bit below the historical average.

Is that right?.

Right. Yes. I mean, whenever we do these acquisitions, first of all, the distributors often have exclusive periods where once they get notified of the acquisition and if LeMaitre plans to use them, they have 30, 60 days, sometimes longer, to continue distributing before we can start distributing in the channel. We're also doing inventory buybacks.

I'm not sure that goes against revenue, but that's why you see the $500,000 to $600,000 guidance for Q4. .

And how many direct sales reps do you think were really focused on selling this?.

I mean, that's a funny question because Applied has a sort of different model with respect to direct salespeople. They have, I would say, in the hundreds of direct salespeople, but they sell the whole bag. So they have very -- a very large number of sales reps.

But in terms of the focus, really part of the recent Applied Medical divested the Clot Management Business was the vascular piece just wasn't and isn't a focus for their company. So I'm not sure there was much rep focus. Of course, I'm sure there were a few who did. But in general, I'd say it wasn't a big focus for their sales force. .

So much fewer than 100 or so people you all have selling that product, though, it sounds like. .

Yes. Now keep in mind, of course, our 106 sales reps sell 14 other product lines right now, so they won't have 100% focus on it either. But there's no question that we're a much more suitable sales channel and appropriate sales channel. We sell to vascular surgeons, and these are vascular products. .

Okay. And then last question for JJ. G&A was about $0.5 million below the first 2 quarters.

Anything specific that led to that?.

Yes. So you can start with year-over-year. A lot of that was in G&A. We had a large stock-based comp charge last year and then we had some purchase accounting that went away, Jim. So a nice sort of year-over-year comparison. And then I guess, sequentially, when we've -- I think the lower sales in Q3 reduced commissions a little bit.

And maybe again in Q2, there was a little abnormally high sort of sale -- op expenses, particularly in selling. So I would say, sequentially, good answer as well. I think, generally, we're keeping a nice lid on operating expenses even though our sales reps are up to 106 in the quarter. So I think there's a good answer there.

There's sort of a theme here, which is, at a higher level, we're talking a lot about the sales and the sales topic. But moving down the P&L, the gross margin answer was nice in the quarter and the op expense control has been nice as well throughout the year. .

Okay.

So there was no onetime issue in G&A that you think lowered that spending in the quarter?.

No, no. .

Our next question comes from David Solomon of Roth Capital Partners. .

I want to start with the recent acquisition. Just curious to get your sense on where these catheter lines now position LeMaitre in the embolectomy catheter market. Does this make you guys the leader? Or you -- or did you extend your lead? I -- based on my math, it's about a $40 million to $50 million market.

Is that correct?.

Yes. David, it's Dave Roberts. Yes, that is correct. We think about it as roughly $40 million, maybe $45 million market -- addressable market worldwide. There is a 700-pound gorilla in the space. It's called Edwards Lifesciences, and their product is the Fogarty Embolectomy Catheter. So they're the BAND-AID or Kleenex in this space.

It's the brand that everybody calls the product buy. So we're not #1. However, we were #2 before, maybe slightly ahead of Applied in terms of the embolectomy catheters, and we definitely solidified our place there. Beyond that, they're what I would call smaller, "ankle-biter competitors" mostly in Europe, but I'd say we're a solid #2 at this point. .

Great.

And then regarding the potential customers, how many of them, on a relative basis, are unique? Is it the sizable percentage of your current customer base?.

Right. So I haven't done the exact analysis, but I would say, likely not. Of course, LeMaitre has 4,000 hospital customers worldwide and Applied has 1,000. And when we're looking at the customer list in the U.S., which is highly fragmented, we recognize a lot of the names on it.

So not necessarily, although anytime you get new business, even at an existing hospital account, gets a rep a reason to go in and start a discussion with a surgeon or a purchasing manager, so it could still represent opportunity even if it's not a completely de novo customer. .

Absolutely. And then regarding the Pacific, first on XenoSure. Any updates on the China trial? I believe it should be completing enrollment early next year.

Is that correct?.

That is correct. We're still guiding I think H1 completion of enrollment for the Chinese trial. .

Okay.

And so then that would position potential approval in 2020 or 2021?.

We've -- so we've got these 3 out there. I know you asked about China, but I'll wrap it up with China, Japan and Korea. We feel as though those 3 are the longer ones here. Again, we just got Australia. We've been -- we've actually been applying for 4 years to get the Australian approval, so we're thrilled to have that behind us now.

I feel like Korea comes over the next 12 months. And then I feel like Japan and China, more realistically, are like late 2021 or 2022 topics. But everything is going according to plan. It's just in those 3 countries the regulatory filing speed is like molasses. .

Excellent. And then regarding the sales force, my understanding is that we could be seeing a greater rate of headcount growth in the Pacific.

What kind of expectations could we have for the capacity? What are you guys thinking over the next 3 years or so in the Pacific for salespeople?.

Right. Gosh, that is a long way. Took us [ a lot ] to give guidance for Q1 for sales, right? So I feel as though there's a small whole in the universe here, which is that hiring of Chinese sales reps is a lot less expensive, if you're asking about the Pacific Rim.

It's a lot less expensive than the reps that you would see in Japan, Western Europe and North America, and they're more in the order of $40,000 or $50,000 a head. And so you might see some quick growth over there at some point because of the fact that it's not too expensive.

Although, of course, we need to get some approvals to have the approval pile catch up to the rep count. So that may be a little bit of a change in direction. We'll keep you posted on that. Right now, we only have 4 reps in China, 7 reps in Japan and 3 reps down in Australia. .

Great. And then last question for me. I just want to get a sense of your expectations for those reps' productivity given the new leadership over there. And that will be it. .

Okay, great. So of course, the guy just got in his seat on October 1, and I feel like it's going to be some time. Everyone always asked me, the questions I -- we get in these one-on-ones, one of biggest questions is, when does the sales force become productive? So maybe I answer that and then take that over to Asia with the new guy here.

The bigger topic probably is about Western Europe and North America. And we have a variety -- JJ, Dave and I have a variety of answers for when they become productive. My answer, and maybe I'm turning into the guy who doesn't give out information at all, but my answer is, it will happen.

We never know when it will happen, but it will happen and it will be good in x number of quarters. But to get to that is really hard math for me. Some reps never turn into productive reps and some reps become productive within 1 quarter. But you didn't ask that, you asked about Asia.

And I would say this is -- opening up the Singapore distribution facility and hiring a VP of Asia-Pac, it's something we've been talking about a lot around here for, I don't know, for 3 years or so. Really excited about it, but I do feel like that's a 5-year project. And we do feel like, going forward, Asia-Pac is probably a faster grower.

In general, it grows about 15% organically a year if you look back for 10 years. And that, as we all know, is markedly higher than what I've gotten out of Western Europe and North America. So I think it's going to go great. I definitely have had a sense, David, that I was flying over -- I am still, I'm flying over to Tokyo myself.

I'm flying over to China. I'm flying over to Melbourne. It's probably not a good use to my time given that it's just a $6 million geographic grouping. And so I think one of the big benefits of having this fell in place is it's going allow me to get back a little bit to what I do in Burlington.

And then also the flights from Singapore are a lot quicker to go to Tokyo and to go to Shanghai than the flights from Boston. And so it's going to bring a unification to that whole group. We're really excited about it, but it's a long-term project. .

Our next question comes from Brooks O'Neil of Lake Street Capital. .

At this point, I want to stay on a high level. So George, I heard you loud and clear about walking back away from your 10/20 targets. I'm curious if that's a permanent change.

Or if it's not permanent, what are the 1 or 2 things you think you want to focus on most directly to try to get back there?.

Okay. So I think what we're saying is we're no longer going to say that going forward. At some other point and some other world and some other -- at some point, should we reopen it, maybe, but that's so speculative.

It's so far down the path that I'd rather leave it alone and just say, "Yes, we're not saying 10/20 anymore." And what was the other segment of your question?.

No, that's really it, George. I guess, that will have a big impact on the valuations that investors will put on the company because the long-term rate of growth is probably the key determinant of how people value companies like yours. .

Brooks, one of the reasons why I felt like it's important to get this out of the way here at this call is because the results in 2018 make me look like I'm not -- it doesn't work in 2018. We never knew -- 10/20 never really knew about divestitures, and we got rid of a $3 million product line this year. So we weren't really expecting that.

And then all of a sudden, that happened. But I would also tell you, another really important topic for me is when J and Dave and I go into these one-on-ones, I don't know, something like 25% of the time is spent debating whether 10/20 is going to work in 4 years.

And frankly, it just got so laborious to have to walk through that discussion, whereas most companies are just giving you 1-year guidance or in front of the quarter and then the year. I think I'd like to go with quarters and years for now. Let's see how it goes.

I always felt like giving that to you guys gave you a little bit of a sense that LeMaitre saw itself as sort of a -- not a timeless entity, but we're a mutual fund. We're going to grow. We're going to have ups and downs.

But generally speaking, and I think this has been true for 5 of the last 6 years, we've been able to fulfill the 10 out of 20 promise. But so many times in so many meetings you're with a novice investor who's fighting you about 3 years later about 10/20, and it's blocking the message about what's going to happen in the next quarter.

So I kind of started thinking it wasn't helpful for me and J and Dave and these one-on-ones to have this. So in addition to, yes, it doesn't work with 2018, it was also kind of blocking our short-term message. And also, it's assigning to us the responsibility of what happens in 5 years.

And we all know, particularly on this phone call today for this company, even the near-term future is a very difficult thing for people to guess at. Forget about 3 years from now. So I guess, inside of all that, yes, I agree with you.

The company is more valuable if someone's standing there saying, "I guarantee it's going to be 10% growth for the rest of eternity." But I think, "Hey, let's see what happens in this quarter that comes up.

Let's see how we do against guidance." And then I expect you guys to go, "Okay, well, they hit their guidance, good for them." And then let's guide into Q1 and then for next year and see what happens then. I'd rather be playing it that way for now. We had been playing it the other way before. But I'm glad you brought it up.

It's a good high-level topic, which I'm sure a lot of your analyst peers are very interested in what's going on in our heads about that. .

It sounds to me like the investors are concerned about it too, and I really appreciate your answer. I hear you, and I appreciate your candor. .

Well, thank you very much. It feels to me as though the questions are all out, and we're awaiting the operator to do something next. .

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..