Welcome to the LeMaitre Vascular Fourth Quarter 2016 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would now like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Shanell. Good afternoon and thank you for joining us on our Q4 2016 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 will make some forward-looking statements, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, February 21, 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, as well as 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, at www.lemaitre.com. I’ll now turn the call over to George LeMaitre.

Thanks, JJ. Q4 2016 was another strong quarter. I'll focus on three headlines. First XenoSure continues to drive record sales. Second, we acquired Restore Flow and we continue to evolve into a biologic implant company. And third, we closed 2016 with 96 sales reps, a high watermark. As to our first headline, the XenoSure biologic patch continue to drive growth and was up 42% in Q4, finishing up a year of 41% growth to $18.1 million in sales. Since 2012, XenoSure's yearly growth rate has been 67%, 51%, 28%, 29% and now 41%. While we benefited from a competitor back order in 2016, we continue to make significant market share gains separate of this one-time incident. Indeed, XenoSure grew 54% in January 2017. Q4 2016 growth was also supplemented by [indiscernible] which was 65%, largely due to the introduction of a longer version of the device. As for our second headline, we continue to make biologic acquisitions based on the success of XenoSure, as well as our increasing confidence in the role of biologics and vascular surgery. As you may remember, in 2014 we acquired the Omniflow II biosynthetic graft and in early 2016 we acquired the ProCol biologic graft. More recently in November we acquired Restore Flow Allografts. Restore Flow posted LTM revenues of $3.7 million prior to the acquisition and we paid approximately $12 million of cash at closing. Another $2 million payment is expected to be due in May 2018. Our sales force is enthusiastic about this latest acquisitions and revenues are on plan coming out of the gate. Sales of biologic implants were 29% of our total revenues in Q4 2016. Indeed, we will shortly be breaking ground on a new clean room in Burlington that will be dedicated to biologic implants. As our third headline, we ended 2016 with 96 sales reps, a high watermark. This is an increase of 10 sales reps versus the 86 that were on the payroll at the end of Q4 2015. We are now selling direct in 21 countries through nine sales offices. Our sales force represents a strategic investment that we expect to drive growth in the years to come. We expect muted growth in the rep headcount in 2017. Before turning the call to JJ, I want to remind you LeMaitre Vascular's simple financial objectives; grow annual reported sales 10% and grow annual operating income 20%.

Thanks, George. Q4 2016 operating income was up 27% versus Q4 2015, that's 14% sales growth outpace 9% expense growth. As a result of this leverage, we produced cash from operations of $4.2 million in the quarter. Similarly, for the full year 2016, operating income was up 42%, that's 14% sales growth outpace 9% expense growth. In 2016 we produced cash from operations of $16.9 million. Due to our continued ability to generate cash, our Board of Directors has increased dividends for seven straight years, this time to $0.055 per share an increase of 22%. Is also worth remembering that our Board has authorized a share repurchase of up to $5 million. Cash production has also allowed us to buy companies each year. In 2016, we spent $14.7 million in acquisition-related payments and $3.3 million on dividends and our cash balance was down only $3.2 million. Turning to guidance, we expect Q1 2017 sales of $23.5 million an increase over the prior year of 16% on a reported basis and 12% organically. We also expect Q1 2017 gross margin of 71% and operating income of $3.9 million, an increase of 18%. For the full year 2017, we expect sales of $99 million an increase over the prior year of 11% on a reported basis and 9% organically. We also expect a full year 2016 gross margin of 71.5% and operating income of $20 million, an increase of 22%. With that, I'll turn it back over to our operator for Q&A.

[Operator instructions] And our first question comes from the line of Chris Lewis of ROTH Capital Partners. Your line is now open.

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

Hey Chris.

I was hoping you could just elaborate on what you saw in the fourth quarter in terms of the sales number a little bit below the revenue guidance, I think it's the first time in quite a while that you haven’t at least met your guidance expectations. So, wondering if you could just elaborate on where the slight revenue softness was derived in, in the quarter versus your expectation?

Yes, thanks for the question Chris. It's a good one obviously. So, we missed by about a little over 1% or so on the prior guidance and I would say nearly a 100,000 of that was actually in FX topic. The euro moved from 109 to 108 or so and in the yen moved as well and so I think that FX piece we got caught up a little bit there. And also, I think valvulotomes were probably a big part of the story sequentially. We talked about the recall issue and sales in Q3 being a little stronger and expecting them to be a little bit weaker in Q4. I think that phenomenon maybe was a little more pronounced than we had thought it was going to be and so maybe that makes up the rest of it. And there was a 50 K topic that internally we were actually at 23.65 around 23.07 for you guys. So, there is a piece of it there, which is sort of just a plumbing topic. So, I think those are really the three pieces that made the miss on the topline.

And just going back to that valvulotomes recall, I think you pointed around $300,000 in my memory is correct, of push forward revenues. So, it just seems like maybe it was a bit larger than that and that…

Yes, of the miss, I am thinking we were probably a couple 100, 250 grand delta from what we were thinking and what actually happened Chris.

Got you. And then could you just talk about what you saw with gross margins in the quarter, a bit below expectations as well and some of that's derived a little bit lower revenue based, but just walk us through the gross margins and kind of where the factors were that led to that in the quarter?

Yes, it was a difficult gross margin quarter in terms of the mix. We had nice strong factory direct in China sales where those margins are typically a little bit lower and so that hurt the margin and generally our U.S. versus OUS mix, the OUS is where the margins are a little bit weaker than in the U.S. and so that shifted a little bit as well. And then that valvulotomes piece didn't just affect the topline, it also bled through the gross margin line because we have a nice strong gross margin on valvulotomes when you're a little weaker in those. Sequentially or year-over-year that's going to hurt your gross margin as well. And then I would say some manufacturing inefficiencies, particularly with respect to yearend inventory cleanup sort of some one-time items. So, I think that that that's kind of the story of Q4, but as you saw going into Q1 we're thinking we're going to rebound the mix is going to normalize and the manufacturing pieces are going to normalize. Certainly, valvulotomes normalize and there was a little FX nick in Q4 as well related to the gross margin and so maybe that piece as well we'll see.

And Chris this is George, may I jump in really quickly, just on annual basis it is worth noting we picked up 150 basis points from 69.1 in 2015 to 70.6 in 2016. So, some things are going well. We are being slowly pulled back by FX always over the last two, three years on these things.

Understand and just one more and I'll hop back in queue. For Restore Flow this year, can you walk us through what you're assuming in the guidance in terms of sales and how should we think about the cadence of that business coming on board, thanks?

Sure. So, I know you've analyzed us exactly, but we did 550 or 525 JJ, 525 in the last six weeks of Q4. We felt like there was almost precisely on top of what we were expecting. We're not really guiding individual product lines Chris, but we do feel like it's rational to look at that $3.7 million business and think that's at least going to be there in 2017 if not a little bit more. But it feels really good. The sales reps are really excited about this piece. I think one of the -- maybe Dave can talk to this at some point in the call a little bit, but one of the exciting things about this acquisition was it was big enough to get the domestic sales forces' acquisition and a lot of as you know, a lot of these acquisitions we made in the last three or four years have been a little bit small and so the size of this has gotten a lot of focus on the reps. So, we expect great things at some point out of this.

Okay. Great. Thanks.

Thank you.

Thank you. [Operator instructions] Our next question comes from Rick Wise of Stifel. Your line is now open.

Hi guys. It's Jeroen for Rick and I just wanted to start on the guidance, but just looking at your first quarter '17 and full year topline guidance, it seems to imply maybe a deceleration in the back half of the year. Is this due mainly to challenging second quarter comps? Maybe just walk us through some of the puts and takes that we should be thinking about as we progress through 2017 and maybe give us a little bit of color of what you're expecting in terms of U.S. and international burst through the year?

Yeah, so I think you touched on the larger topic which as you know we had a nice Q3. The competitor back order piece was a large part of that and so those comps will be a little bit tougher. The good news is we're going to keep a decent chunk of the backorder piece that we took from Baxter and we look forward to that, but certainly the comps in the back half of the year will be a little bit tougher when looking at Q3 where we put up some nice numbers and even in this Q4 with 14% and 11% growth rate. So, those are a little bit tougher on the comps I would say on the topline piece and so yes, you see that skewing from H1 to H2, but otherwise I would say underneath that I think you asked the question generally about the cadence of sales I would say, sort of beyond that piece I think we were expecting more strong growth out of the U.S. I think you saw our U.S. results were pretty strong in this quarter and the international results continue to just do well also. So, I think we'll continue to see that too.

Okay. Great. And then just touching on Baxter, it sounds like you've kept quite a few of the competitor accounts. Can you maybe just talk about are you seeing any type of cross-selling in these accounts yet or are they really just still focused on buying XenoSure?

Yeah, so I thought you're going to say, this is George, I thought you're going to say cross-selling within the XenoSure product line, so that's an easy yes that we were selling a little patch then they're going off and buying different sizes. I don't have a great answer to that, to the second part of the question about crossing outside of the XenoSure account. Almost certainly that's going on. It's the entire playbook at LeMaitre Vascular, which is cross-selling. That's why we sell 15 product lines. We get the hospital in the dawn one product line and then our sales men and women work that -- work that customer to broaden the portfolio. So almost certainly that's going to take place at a normal pace. I don't maybe this is a little too soon to expect at all to have taken place, but almost certainly yes, we're going to get the halo effect.

Okay. All right and then just lastly on salesforce for me, you talk about -- you talked about muted sales force hiring in 2017, should we basically be thinking maybe as three reps along those lines and maybe just what geographies are we going to be adding reps and would then be existing territories or more on the Greenfield hiring?

Right. So, we're up so much, we're up 15 reps from Q2 2015 now. So we're up so many reps. I feel as though yeah, maybe we add one, two, three as you're mentioning, something like that, but I think this is going to be a year of consolidation. I think one of the -- when you sign up for this 1020 thing that we've signed up for, it does mean your sort of into a pay-as-you-go model with the sales reps. And so, we want to be prudent while I make sure this investment works and then move forward after that. So, in short answer to your question, maybe one, two or three reps and I don't know we were exactly split right now, 49 international reps and 47 U.S. and Canada reps. And so, I think it'll be on either side of the Atlantic if not Asia.

Okay. Great. Thanks guys.

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

Hi, this is actually Cecilia on for Jason and I just wanted to ask about the increased dividend and should we think of this as an indication that M&A opportunities are either becoming harder to find or riskier to do and also just your updated thoughts on the current M&A landscape that you're seeing?

Maybe I'll hand over the dividend portion for you Cecilia. This is George and I'll pass it over to Dave for the acquisition side. In terms of the dividend, we're really excited about increasing the dividend. We think of ourselves as a shareholder-friendly company and we're trying to do repurchases and we're trying to do dividends. So, this is all just great for us. I don't think that indicate anything because we feel very comfortable having following capacity as well and of course I don't know what the number is $24 million in the bank. At the end of the year that's plenty of money to go deploy into acquisition. So, I don't see that as if-or. I don't see it as one of the other ideas. We're trying to do both of those things. Maybe Dave can address the pipeline and some of the question you had inside of that.

Sure. And maybe just before I do, with the $20 million of last 12 months, the EBITDA certainly as George mentioned the borrowing capacity is out there, but Cecilia, good question. Our acquisition criteria remains very consistent in terms of what it's been before. We're focused on products used by vascular surgeons in niche markets. We're looking at deals which are a little bit bigger these days. Of course, as you could tell from the script, we like the biologics space a lot. So, we wear out there hunting and I think we've done one or two deals at least one or two deals in each of the last four years. So, we're out looking and the pipeline looks good and at some point, you can expect another one, but it's just of course very situation dependent.

Okay. Thank you. And then my second question and I wanted to just go back to gross margins briefly and just looking out into 2017, Q4 came in a little weaker but what are the primary sources of gross margin leverage, the cadence throughout the year? I know you've touched on manufacturing efficiencies XenoSure mix and just anything that you could call out? Thank you.

Yes. So, the good guys generally are average selling price increases, which generally happen around the beginning of the year and certainly manufacturing efficiencies in our XenoSure product line and our HYDRO valvulotomes product line I think we've made some really nice progress on both of those and I can see I think some more nice progress coming going forward. So, lowering cost on those, but also as the mix increases on those product lines as a percentage of sales that'll help as well with the gross margin, we recall as a third item the protocol acquisition earlier in the year that's being hit with some purchase price accounting right now that's running through cost of sales. That goes away in a number of months and so that will help improve the protocol gross margin and then the same thing with Restore Flow over time as that purchase price accounting goes away, not soon, but as it goes way over time that will help the gross margin. So, I would say all of those things and certainly FX has an important impact on gross margin to the extent that in a weak dollar, that benefits our gross margin.

Okay. Thank you very much.

Thank you. And our next question comes from the line of Raymond Myers of Benchmark. Your line is now open.

Thanks for taking the questions. George, on the third quarter call U believe that you discussed the hope to retain at least $500,000 of XenoSure from your competitor during the fourth quarter. What's your estimate of how much XenoSure you retain from the competitor?

I feel like it's right on top of that number. It's really -- it's really hard when an order comes in to distinguish between what's retained and what's not, but we feel like it's right on top of that number. I think you get it. We're giving you a little sneak peek into Q1 for XenoSure, which is January sales were up 54% and if you think back to before all this started happening, XenoSure sales normally grew in the high 20s. So, you get a pure month in January of 54% and you get Q4 of 42%. So, I think it's sticking around. In some ways, also philosophically, this one-time incident was sort of more just an accelerant of what we've done tremendously while taking over this market from inert competitors as well as biological competitors and I think it just pushed it forward a little bit by a couple years or a year and half or something like that. So, we're good at keeping this business. This is something we're good at it and I think the competitors are not as good right now at this business.

That sounds good. You mentioned that you're opening a new biologics clean room shortly. Can you elaborate as to what that's for and what new capabilities does that provide?

Sure, well okay. So, you know that we have a factory in Australia right now, which makes a biologic, a sheep-based biologic. You know we have a factory in Chicago right now, which makes -- which processes this cadaveric bio vascular device and you know that we have -- we bought a company out in California the ProCol acquisition. So, you have three buildings outside of Boston that at some point, one or two of those guys needed to come in-house and in addition to that you have XenoSure growing at what is 40% a year, 50% a year something like that, looking backwards. So, we're starting to outstrip our manufacturing capabilities in terms of biologics. So, what we've done is we've just carved out half of one of our three buildings and I think it's about 8,000 square feet that we're going to dedicate towards the biologics clean room and some combination of those four product lines was I just mentioned will be put in there and you're probably up and running in that facility Q3, Q4 of this year.

Great and is that mostly a cost reduction measure or does that increase your capabilities or allow you to produce new products?

Okay. So, I think primarily the big issue here is XenoSure and the other issues are smaller, they're biologic, but they're smaller and the big issue is XenoSure and primarily when we built the XenoSure factory in 2014 when we brought the product in house from Vancouver, we bought a fairly small for the job shop oriented facility, which was nowhere near capable of handling the 100,000 and 150,000 units that we're at now. And so, we just -- we've outstripped the 2014 build and now going into 2018, let's call it you need a much more industrial-strength factory. So, it's likely that and then it's a little bit, Dave has been offline in all these companies and at some point, it does make sense from a quality and a cost perspective to bring in one or two or three of those buildings. So mostly about industrial-strength manufacturing for XenoSure in anticipation of a lot of growth and then a little bit about you got to mop up these various factories that you're buying at some point.

Sure. Makes sense. Regarding the acquisitions, on the last call there was a lot of talk about your appetite for further acquisitions, now you did make another one in November, but it was about $14 million purchase price. There have been some talk about possibly an appetite to do some larger acquisitions, does that still exists?

Ray, it's Dave. Good question. Yes, absolutely it exists. Again, Restore Flow, it was a sizable acquisition for us in terms of the amount of the cash we put to work, but as we look forward, definitely we're looking bigger certainly. Restore Flow had about $3.7 million in last 12 months’ sales at the time of the acquisition and I'm definitely looking in the $10 million, $15 million even $20 million range for revenue. So, we are looking larger, but we'll look midsize as well. I think the most important aspect is it fits itself to the vascular surgeon, it's in the niche market. We like the biologics and sort of all those criteria but if it's checking all the boxes, certainly we would rather do a large good acquisition and a medium good acquisition.

Okay. Sounds good. Thank you. And the last question is your appetite for share buybacks, I know you have one, can you remind us, did you execute any of it and do you plan to?

So, we can tell you, we did not execute it at all yet. We're still at the beginning. We're sorting out some technical aspects of the whole thing, but now it's just what happens internally processing when we decide to buy shares and I think it's just something that happens inside this building and I don't think we would share all of our cards with everyone. But no, we have not done any of it. There is still a full $5 million dry powder ready to go.

Great. Thank you.

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

Hi guys. Good evening. Few questions. Valvulotomes revenue for the year, do you guys have that handy?

We do. We don't tend to break all these out. We gave you XenoSure this year. I can tell you it grew 9% organically for the year and I think 9% on a reported basis as well JJ if I am close?

Yes. I think it was a little bit more than that for the year. I am looking around mid-teens for the year in Valvulotomes but we'll get back to you on the exact number.

Mike, I am answering it that way to let you know, so there is a little bit of your Q3 versus Q4 topic. Valvulotomes did continue to grow on a sales basis again in 2016 like they have for the past 10 years. On a unit basis, it's a relatively muted experience here as we've been pretty clean and clear with you guys over the years, but we had a good year despite the up and downs.

Okay. Is there any -- you guys have gotten a lot of -- a lot of mileage out of that product line. Is there anything on the drawing board in terms of improvements or innovation you can make on that product or and on your bones other ways?

Right. So, in answer to your question, short answer is no, we're currently not doing it on valvulotomes. We did spend the last four years getting to the 1.5 and then getting to the Hydro. So, we put a ton R&D time and effort into that big transition which started around 2012 or 2013, but if part of your question might also be where else can you go your R&D dollars, we are very excited about this prudent march on that we've got coming. The Chinese XenoSure trial while it hasn’t really started just yet, we're really excited about what that will lead to for us and we also have the -- you noticed that that long Anastoclip, which is indicated for Dura, did really well and it drove Anastoclip up 65% in Q4. We're trying to get the grip clip version, I hate to complicate this, but we have the A-clip version as approved for Dura and we're trying to get the grip clip version approved for Dura and those are big changes as we mount our attack on the neurosurgeon as it relates to these clip devices. So, I would say those are three biggies in the R&D final that are going on right now. I know you didn't exactly ask for that. In addition to that, there's a bunch of past maneuvers or XenoSure maneuvers that were in the middle of doing and as the next 18 months comes clear, all these changes that we're doing will come clear and there's some nice adds to that what is now becoming our biggest product line.

Sure. Got you. So, I guess shifting over to XenoSure, obviously this massive numbers in '16 great start in January, is there any way you guys can kind of ballpark in terms of what you're expecting there, how much of the incremental $10 million in revenue comes from the XenoSure? Is that a 20% grower going forward? Is that a way to think about it or is there a way to bracket a range that you guys might have in mind?

You know what, we read out those growth rates in the last five years to put the Rubik's cube in front of your guys instead of in front of us. So, this is a hard one to get at. I do know I think broadly speaking if you did a 28% or 29% growth and I'm not guiding on that, I am just giving you, you can pull down half of that $10 million number by doing the 28% or 29% growth number if you follow me. So, you're trying to get $10 million in growth and you're solving for $10 million. Half of it can be taken out if you do 28%, 29% for XenoSure.

Right. And we get another four.

No guidance by products. We have a hard-enough time putting together a full-year guidance for you guys and we got to it. We feel really good about it, but we can't do by product because it's a mutual fund. You guys know this. This is a mutual fund of vascular devices and one guy is up, one guys is down and all kind of works out in the end, so no guidance on products, but lots of hints about the past.

Absolutely, absolutely. So, one more, part of your historical guidance on the $10 million and $20 million, goal I think is generally 4% volumes, 4% price and 2% acquisition. I think that's right. I guess what I'm getting at is did you guys essentially hold up your end in terms of the price increases for this coming year?

Right. So, I am not going to do coming young and look backwards for a second and you had a 12% organic number, 11.9% specifically and 4.4% of that we think or 40% came from price and 60% came from units. So normally the quote unquote "10% reported guidance we try to give you guys for the intermediate term, we think I know this is going to be a little bit odd, but we think it's 8.3% organic and the balance of 1.7% acquired and we think over time FX is going to wash in and out of that number. This year we gave you a 12% organic number this past year and 40% price, 60% units.

Okay. So, and I guess are you willing to give any commentary on I assume you guys raised prices at the end of the year or the beginning of the year, were you guys in historical ranges generally speaking?

Yes, very much and these places are available to everyone. If you go to a hospital, they're out there. So, this is not that much of a secret. It felt to me like it was the exact same type of price hike that we usually try to go to maybe a little bit more, although I see a little bit more discounting these days as these IDNs get together and they negotiate against you. So, I would say you can write in that presentation day. The presentation went up on the web and the 2016 number is 4.4%. Okay. So, the 2016 number, we held it together if not got a little bit better versus not 2015 because that's a hybrid switch, but before that, it was trending into the 3.8 and 3.9 and we put up a 4.4 in 2016 and I would say that's the last good piece of information on that topic and that we're all going to find out what it means next year, but it feels like it's business as usual at LeMaitre.

Okay. Fantastic and maybe I can get that valvulotomes number later on JJ, is that okay.

I don't know if we're really in the business of doing that to be quite honest. I think maybe that's now what we do here. So…

Okay. All right. Thanks.

Thank you very much Mike.

Sure.

Thank you. And 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.