Welcome to the LeMaitre Vascular Fourth Quarter 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. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, Ashley. Good afternoon, and thank you for joining us on our Q4 2018 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 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, February 19, 2019, 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 as well as return on invested capital and operating income growth expectations, excluding certain one-time gains. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in 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, J.J. We posted record sales of $28.4 million in Q4, a 9% increase year-over-year. This was largely the result of our sales rep surge, our two recent acquisitions and a 79% quarter in Asia-Pacific. We entered the year with 108 sales reps versus 90 at the end of 2017, a 20% increase. This increase was spread across our three major geographies: The Americas, EMEA and APAC. As we look to 2019, we intend to maintain roughly this level of sales reps. We also promoted a 15-year LeMaitre veteran Chance Kriesel to the position of VP Sales for the Americas. In January, we began our worldwide installation salesforce.com. Our two recent acquisitions Applied Embolectomy business and Cardial, contributed $1.9 million of sales in Q4. We acquired these products because they are complementary to our current catheter Valvulotome and Dacron Graft product lines. These should be nice vascular plug-in acquisitions, right out of the LeMaitre playbook. These two acquisitions had sales of about $6.9 million in the year prior to their acquisitions. Asia-Pac sales were driven by 68% organic growth as well as the acquired embolectomy catheters. In Q4, we also established our APAC headquarters in Singapore. On the XenoSure regulatory front, we obtained Australian approval in September, we have 224 of our 288 patients enrolled in the Chinese clinical trial and we filed for Japanese approval in December. From a product perspective, carotid shunt, surgical glue and embolectomy catheters were our top performers in Q4, while XenoSure grew 4% organically -- excuse me, 5% organically. As a follow-up to the Q3 earnings call, our allograft business posted record Q4 and grew 18% and we made significant progress with tissue supply. Valvulotome's also bounced back in Q4 to post a record quarter. I expect our 9% Q4 sales growth to extend into 2019, as reflected in our 8% sales guidance. With that, I'll turn it over to J.J.

Thanks George. Our Q4, 2018 gross margin was 67.7%, down 2.1% versus the prior year period. This was driven primarily by the addition of lower gross margin Cardial and Applied sales and the subtraction of higher gross margins, Reddick sales. We did this to further focus our Call Point on the vascular surgeon. This new lower gross margin may persist for several quarters, while we execute integration and cost cutting measures typical after our acquisitions. As a reminder, the Reddick general surgery divestiture was in April of 2018. We ended Q4 with $48 million in cash, an increase of $2.4 million during the quarter. The increase was driven by cash from operations of $6.6 million in the quarter. For the full year, we generated $19.5 million in cash from operations. Excluding the one-time gains from the Reddick Divestiture and Cardial acquisition, our return on invested capital was 20% in 2018. Our Board of Directors recently approved a 21% increase in our quarterly dividends from $0.07 to $0.085, applying a yield of 1.4%. Our Board also authorized the share repurchase program of up to $10 million of our common stock. Our guidance is detailed in the press release; highlights include 8% reported and 5% organic sales growth for the full year 2019. We also expect full-year operating income adjusted for one-time gains to improve 9% to $22.6 million at the midpoint. With that I will turn it back over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Jason Mills with Canaccord Genuity. Your line is now open

This is actually Cecilia on for Jason. And I just wanted to ask about the recent acquisition and really what drove the strong Q4 performance? And then just looking at guidance for 2018 what are your expectations for the business going forward, just quarterly cadence as well?

Okay, lots in there, maybe we break it down maybe Dave you take the acquisition part of the question.

Sure. Thanks Cecilia for the question. Yes, you're right to point out that the acquisitions that we completed on September 20, the Applied acquisition and the Cardial acquisition we completed on October 22 are coming strong out of the gate. The two deals combined are running 6% ahead of our deal model. Cardial especially is doing well. It’s about 20% ahead of the model. And that was driven by -- we got really a few orders that we didn't expect that quickly. One was a glue order in the Middle East and then also some OEM orders that -- there is a small amount of OEM business at Cardial as well, but at a high level the transition plan for both Cardial and for Applied, the channel transition is going very smoothly. There's one more material distributor transition with Applied. And so we're just pleased that their performance in Q4 was better than we expected.

And then Cecilia in terms of the quarter, there are number of things that went well and coming out of Q3 some of these are important as well. So we talk in Q3 about RestoreFlow being down 5% last quarter was an anomaly. It was up 18% this quarter, nice rebound and sequentially up $400,000 or $500,000. So, a good story underneath that RestoreFlow sort of bump of Q3, still coming through in Q4, and hopefully into 2019 as well as we add new customers, as we plugged that product line into our sort of 50 or so sales folks in the U.S. We talked valvulotomes if you recall in Q3, and that was down a little bit as well. Sequentially, a really nice rebound as valvulotomes $4.5 million maybe up to $5.5 million or so. So, back on track if you will in valvulotomes. Our export was down in Q3 as well, a sequential rebound there, though there still an issue year-over-year with sort of growth topics there and we've talked a lot about those in the last two calls. So year-over-year comps in our non-direct sales still not great, still working on those, we will get to those, and we will fix those. But sequentially from Q3, a nice rebound. And so those topics really repaired nicely in Q4 versus Q3. And then on top of that the acquired sales that Dave was talking about really lead to a nice strong Q4 and so forth.

Okay.

Cecilia you asked about cadence for the quarter also. So, we -- at the beginning, we usually don't break it out. I would say, as we were going through selecting our guidance and looking at the quarters, it didn't seem like there was anything really that odd about this year, typically Q2 and Q4 are our largest quarters of the year.

Okay. Thank you for all the color. And then just looking at OUS trends, just specifically Asia-Pac, kind of what you're thinking going forward through 2019? I realize you don't break out specific sequential numbers, but just kind of overall trends what you're seeing there? And what you think you can do going forward?

Right. Maybe I'll look to hit three to answer that question, because you're right, we're trying not to pull apart guidance into three regions. But I think when we were looking at this, one of the reasons, we're so excited about Asia-Pac is that if you look back our last 10 years of our business, I think, I'm quoting big numbers, but I think organic growth is up like 11% a year for the last 10 years, whereas Europe is kind of 8% and Americas is kind of 4% or 5%. So I think there's a material difference between Asia-Pac and other two, it should be the place that grows the best, that's why you're seeing us build the Singapore office and start growing the sales force over there a little bit more.

Okay. Great. Thank you for taking our questions.

Thank you. Your next question comes from the line of Joe Munda with First Analysis. Your line is now open.

Good afternoon guys. Can you hear me okay?

We can Joe.

So real quick, you talked about a rep search, you're at 108. Can you give us a breakout North America, Europe, rest of the world? And then your thoughts -- you're going to stick with the same size force going into 2019 here? I'm guessing maybe you can give us some color on what your expectations are as a result of this recent surge and as it carries over into 2019?

Okay, great. So, breakdown is the Americas or North America as you're putting it, 57 reps right now, that's up 24% year-over-year. Europe is at 38 reps, that's up 12% year-over-year, and Asia-Pac is 13 reps, which is up three people, which is up 30%. So the whole group as we mentioned is up 20%. You have the guidance right now. We're saying 8% reported sales growth guidance. We think this is a pretty good foundation for that growth rate, but we don't know and we don't know really when they exactly come on. We just have a feeling things are getting a little better around here every day that we have these reps on, as far as how many reps we're going to have for the year? Is it 108? We actually have eight or nine in the middle of being hired, but there is always what we call breakage, which is some people coming, some people going. So maybe 110, 112, 108 is kind of which you can think is going to be happening. But it will go up and down. We're not too focused on it. When we quote misguidance and there is fewer reps than there should be. We don't get that worried about it. When we overdo it, we don't worry about that either. Something like 110 or so.

Okay. And then – that's helpful. And then JJ can you give us a split out, how much biologics were as a percentage of sales in the quarter? And as a group how much they were up?

I think biologics were about 35% of sales in the quarter. And I think that was a 10% or so increase in the quarter, Joe. And we've got a new entrant's in that category the glue that we acquired from Cardial is now in our biologic category as well.

Okay. Okay.

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

Good evening, guys. A few questions. In terms of valvulotome, what was the year-over-year comp on that? I didn't catch that if you've provided it.

Right. I think we didn't say it. We just said it was record, but I'm happy to say it. I think it was up 2% organically and it was a record quarter.

Okay. And then I just want to confirm what I think I heard. Was it 244 out of 288 are enrolled in XenoSure trial in China?

Yes. 224 of 280, 224.

224 of 280. Got it. Thank you. Glad I asked. And George, I guess, in terms of the top line guidance and I'm not asking you to go back to the 10 and 20, but just generally speaking in the 8% top line, what's assumed there for pricing and if there – is there any M&A assumed in there for other than what's already – the recent transactions?

Okay. So easily the answer is no. There's never M&A in our guidance. We always just = what we've already bought plus what we are. So no M&A in that. And then as far as pricing goes, I would say, we'll see what happens with pricing this year, but in general, it feels to me like LeMaitre is a 3% or 4% price hiker each year. So it's been a little bit more challenge in last couple of years and we use to be more like a 5% or 6% five years ago.

Okay. All right. And obviously some positive unit volume assumption as well.

And the balance being unit volume yeah.

Yeah. And then I guess, JJ in terms of getting at the efficiencies and maybe this is just me not quite remembering correctly last few years, but it feels like you guys have been able to get efficiency usually quicker than maybe, it seems like – you're assuming that you'll get at efficiency this time in terms of sort of taking the gross margin back toward 70%. Are these recent acquisitions just a little bit tougher to integrate or any comment around that?

Yeah. There has been – I think that typically when we do an acquisition that doesn't come with the facilities and doesn't have a lot of sort of tribal knowledge or we're learning a new process, or about a new product things happen a lot quicker, when we move that product line into our facility and off we go. In the case of allografts that's a pretty complicated logistical challenge, as it turns out we've figured out a lot about that over the last 1.5 year or so. And so we're starting to improve that part of the equation, but it's taking longer than usual I think that's generally correct observation. And then what's -- in recent two acquisitions, they're coming at a pretty low gross margins in the sort of around 40%-ish range or so. And so those will drag us down for a while until we figure out how to grapple with those, but I think you can bet that we'll be working on all of those pieces going forward, figuring out how to get efficiencies out of those.

Mike, I think it’s also germane that we have four factories outlying right now and when you have four, you can't -- it's impossible to be closing four at the same time. So some of them necessarily they're going to be open a little bit longer than you might want or you might think that we would keep them open. So as part of that is, hey we just did two, therefore, you can't -- we don't have infinite bandwidth inside LeMaitre to close four factories at once.

Got you. And just last one on the surprising recovery particularly in terms of degree and allografts. It seems like you guys had set expectations of, hey, this may take a while to work through, there's customer loss, there's sourcing difficulties, but it feels like a really quick and strong bounce back. Are you guys on the other side of that? Or is there still stuff to work through?

I think certainly in the quarter that was a strong bounce back. And I think the big high level answer is still very much intact, which is we're acquiring new customers daily in the new larger sales force, maybe we added 120 or more since the acquisition and that will essentially take over from that issue that we effected -- that we saw -- that affected us in Q3. But I would say you might get a little chunkiness even though we recovered really quickly in this quarter maybe it's a little chunky here and there as we go through the year next year. But I think the story high level over the next year is still intact as well, which is you can probably expect some decent growth out of that as we continue to grow that customer base.

Okay, very good. Thanks guys. Really appreciate it.

Thank you. And our next question comes from the line of Jim Sidoti with Sidoti & Company. You may proceed.

Hi, good afternoon. Can you hear me?

Yes we can.

Great, great. I just want to go over a couple of the numbers you put out before. You said RestoreFlow was at 18%, initially I think it was up 5%? And then did you give an overall number for the biologics business?

Yeah we said at 10%, Jim.

10%? Okay. And you said you improved the situation with tissue supply. Can you give me a little more color on that?

Sure. This one's a pretty clean cut one. I think, I said this on the last call but I forget. So we were having tissue supply problems and you may remember, I grew a beard to protest the back orders for our tissue. I think we talked about this the last time, I don't know while the beard got shaved on January 23rd at our holiday party, and the beard was supposed to the present we want to make sure that we have 10 of the 70-centimeter devices available and 10 of the 80-centimeter devices available at all times for our reps. That had not been the case before the whole back order of beard project started. We think we're good to grow on that part of the supply issue.

All right. Thank God it was you and not J.J.

Its hard not to see that.

All right. You talked about the Asia-Pac office the office in Singapore. What's approved right now that you can sell in Asia?

So that's always a big topic, the regulatory burdens are a lot heavier over there, but we're growing percentages. And on our website there's a presentation that always shows what percent in each geography, so I'm going to talk out of memory, but you can go find it after you get off the call. I think in Japan about 55% of our sales are approved. I think in Australia about 83% of our sales are approved and I think in China about 25% of our sales are approved. So another words all the catalog numbers we have our Chinese sales reps, the four of them only can sell 24% or 25% of those catalog numbers. And so they're certainly ham-strong and there's great blue sky later for those folks, but in Australia, I'd say we largely have it going on. And then each country is different, there is no CE mark for Asia. So then after that each country is different and its -- a couple of them are detailed on the website.

All right. And then the last couple, it sounds like you expect a little over $5 million from the acquisitions in 2019, now you said the sales 12-month sales are close to about $7 million. Is the delta just the difference you did in the fourth quarter?

I don't remember saying we're going to do $5 million for these products this coming year. Was that some kind of trick?

Well it's in the press release.

Did we see that?

I don't think we did...

You're on the semi-small guidance that we gave at each press release when we bought the products. So that was the initial couple of first three months. I think we guided, I don't know $550,000 for Applied medical and I think we guided $300,000 for Cardial. And those were just in the startup quarter and that what was all we gave with 550,000 and 300,000.

All right. If you look on page 70 of press release, you have a net impact of acquisitions excluding currency of $5.3 million?

So that's the organic -- part of the organic growth count, Jim. And so, if you take an annualized number and then you adjusted it for when you acquired the product line, so you don't adjust out of full year for Applied because you bought it in September, October. You don't adjust out a fully year. So that's why it's lower than if took the two of them and added them up for an annualized number you're going to come up with whatever around $7 million or so. It's lower because you don't adjust that out of full year for those, you adjust out as of when they were acquired.

Okay. All right. So that's what I was saying, because you did about $2 million of revenues from those products in the fourth quarter.

Yes. And that was a particularly strong year. So the first question of the call Dave answered and we got this huge orders from Iraq related to one of the product lines. So it was a bit anomalous I would say in Q4 the revenues that we saw on the two acquisitions.

Yes, I wouldn't -- Jim is Dave. I wouldn't necessarily take Q4 and multiplied it by four. Again, because of the anomalous order to Iraq as well as some OEM business. But even without all that we felt like it was a healthy start for the two acquisitions.

Okay. And then last question. It looks like you expect about $2 million currency headwind in 2019. What’s currency are there, the troublesome ones?

The euros is a big bugaboo, so it was 118 or so for 2018 and we're now at 113 in change or so. So, there's like $1.5 million topic from that year-over-year and then if you bring in the pound and the yen and the Canadian and whatever else, it's gets you about $1.7 million or so. So, having a stronger dollar -- low interest rates in Europe Jim.

All right. Thank you.

Thank you very much.

Thank you. [Operator Instructions] And our next question comes from the line of Brooks O'Neil from Lake Street Capital. Your line is now open.

Hi guys. I have a couple of questions. I am recognizing that there's a lot of moving parts from last year to this year. But how would you characterize kind of the organic EPS growth from 2018 to 2019, if you strip out kind of all the extraneous moving parts, the benefits and costs of acquisitions and stuff like that? How do you feel about the core earning power of the business that you're running today?

Yes, so if you strip out the one-timers year-over-year for our guidance, the EPS growth is sort of flattish. And I would say a lot of the answer is in this gross margin topic. So, those two recent acquisitions are probably a negative 2% bad guide at the gross margin in that range. So that’s $2-plus million that sort of otherwise would have normally dropped to the bottom-line, it doesn't. If you added back that $2 million, you came at a sort of more normalized year-over-year EPS growth number. So, a lot of it is that and then there's another piece of course which is Op expenses. And I think we're expecting they're going to be pretty well in check for 2019, but still growing. So, if you're growing your Op expenses 5%, 6% or something like that and you say your topline is growing 8%, that's not necessarily a tunnel leverage, particularly when you run it through a lower gross margin. So, that's kind of the dynamic of that answer. And I would say as we repair that gross margin over time that will certainly help and as these investments that we're making now and those operating expenses that I'm talking about start to bring on more sales growth potentially, we'll get good answers there as well on the bottom-line.

That's great J.J. And I was listening but I might have forgotten the answer you said earlier, you think you can get that GM up somewhat in 2019 or will it take longer than that?

I would certainly think about it is taking longer; we've guided 69.5% for the full year. So, anything below 70% is not a great number for us, so I would say that's still in repair during the year.

Okay. And then again I'm not meaning to pick at this, but I'm just curious if you strip out the impact of the acquisitions, would you say that you're entering 2019 with accelerating organic growth or is it coming in a little bit lighter than what we saw in the fourth quarter and during 2018?

Okay, so fourth quarter 2018 is a lot different than 2018. 2018 we had 3.8% organic growth, 4% is rounded. So, no the 5% organic growth that we're quoting for next year 2019 seems like an acceleration of organic growth.

Great George. Thank you very much and good luck this year.

Thank you very much.

Thank you. And our next question comes from the line of Scott Henry with ROTH Capital. Your line is now open.

Thank you and good afternoon. Just a couple questions. First, did I hear you speak about XenoSure having roughly 5% organic growth?

Yes, that was in the transcript.

Okay. And so my question is when we think about that, it's pretty large product in the portfolio. When we think about 2019, 5% maybe another 3% for pricing is it reasonable to think about that in the range of an 8% to 10% grower in 2019? Not trying to get two line item focus, but it is a product?

Scott we really do look at this as a mutual fund of devices and so the 5% is for the full whole portfolio. It is interesting you are bringing together, I hadn't really put these together, but you're putting together that it was a 5% grower in Q4 and then does it max the 5% maybe in next year 2019? I don't know. There's some logic to making out exemption, but I don't know. The product line was 17% in 2018 -- 2017 excuse me and then it was 6% organic in 2018. So there's no question that it's decelerated a little bit. But to pull it out for next year, I don't think would be very good at doing that for you.

Okay. But I appreciate the color on that. And then just one other question, R&D has been trending at a higher rate in the past couple of quarters and into Q4. I guess the question is, could you talk a little bit about where that investment is going and what categories you're targeting?

Sure. So at a very high level, we could just say the word XenoSure and then we could also say the CE mark. And the XenoSure side of this is, you're hearing a big approval process going on in Japan right now, no clinical trials -- no human clinical trials, but it's a big process. It just launched in December and you're hearing about the Chinese clinical trial that we're in the middle of the human clinical trial over there. We're also pursuing approval in Korea and we just good approval in Australia. So a lot of this is regulatory related to that. A lot of this is new products related to XenoSure. We've talked a little bit on these calls about XenoSure 2.0, our next gen device. We've talked about XenoSure Dura which is a different indication that we're trying to pursue which other of our competitors have and we've also talked about XenoSure fat guy, which is a thicker device. So a lot of R&D and a lot of regulatory dollars which are classified as R&D dollars on your income statement, so there's that. There's also CE mark which I think a lot of our competitors have talked about on their calls which is, the CE folks are moving to a much more serious system. I would say it used to be a little bit easier than the U.S. FDA 10 years ago and it's clear to me that in three or four years they're going to be harder than the U.S. FDA in terms of approvals, even things that you've already got approvals on, you've now you got to go and prove that those actual devices do work in human beings. And so there's a lot of prospect of studying that they're asking us to do and retrospective study they're asking us to do. All of those things you're seeing come out as R&D dollars for LeMaitre, we're now at 8% revenues in R&D dollars and I feel like it was only five or eight quarters ago that we were at 6% R&D dollars. So, some of the difficulties we're having in expanding our Op margins are certainly related to that.

Okay, great. Thank you for taking the questions.

Thank you.

Thank you. And we do have a follow-up question from the line of Mike Petusky with Barrington Research. Your line is now open.

I figured I'd give Dave a shot to earn his pay here, get him involved. So, David could you just talk about what you're seeing in terms of assets out there, pipeline for you guys specifically, pricing versus maybe what you're seeing 12, 18 months ago? Thanks.

Yes, sure. So, it's funny Mike it's now been about four, five months since we completed those last two deals and well, on the one hand, we've been very focused on the integration. There's a big team inside of LeMaitre helping with that. Also the deal team here we've turned and started moving in the next place. So, I would say at a high level without getting into details, the pipeline does look good, it looks robust. As you, of course know, we've done about a deal a year for a little over 20 years or so, realize I'd say have a decent sized pipeline. In terms of valuations, I think there are a couple of ways to look at it, one is public market valuations. If you look at the IHI Medical Device Index, it's says it's near all-time high. So, public stocks, medical device stocks are fairly high. And then in terms of deals that we see in the space, there was a property that traded in our space recently, Vascular Insights was acquired by Merit for about four times sales, if you include the earn out, it was about 6x. So, I would say that valuations are high. Although normally LeMaitre is not participating in the auctions and we're often in discussions with individual, private companies, or in carve-out, so it's very situational-dependent. So, in that respect, we're always very disciplined in terms of what we pay and we've been like that in the past and I would expect it will be like that for the foreseeable future as well.

All right. Very good. Thank you.

Thank you. And I'm not showing any further questions at this time. 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.