Welcome to the CryoLife First Quarter 2016 Financial Conference Call. [Operator Instructions]. It's now my pleasure to introduce your host, Mr. Pat Mackin, President and CEO and Mr. Ashley Lee, Executive Vice President, CO and CFO at CryoLife. Thank you, gentlemen. You may begin.

Good morning and thanks for joining the call. I'm Ashley Lee, the CFO at CryoLife. Before we begin, I would like to make the following statements to comply with the Safe Harbor requirements of the Private Securities and Litigation Reform Act of 1995. Comments made in this call that look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include statements made as to the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations. Additional information concerning risks and uncertainties that may impact these forward-looking statements is contained from time to time in the Company's SEC filings and in the press release that was issued last night. Now I will turn it over to our CEO, Pat Mackin.

Thanks, Ashley and good morning everyone. I'm very pleased to report that we had a strong start to 2016 which was no easy feat given the many moving parts in the first quarter. We successfully closed the acquisition of On-X Life Technologies and began the integration efforts. We combined three sales teams in the U.S. We went direct in five markets with the On-X product line in Europe. We divested two non-core product lines and put CryoLife on a path toward enhancing revenue growth and expanding our margin. Further, just after the close, we closed on the acquisition of PhotoFix. On today's call, I will be providing an update on the strategic initiatives for 2016 that I laid out at our yearend 2015 conference call in February. Following my comments, Ashley will provide a detailed review of our first quarter financial results. I will conclude with my closing remarks before opening the call for Q&A. As you may recall, our first key initiative for 2016 is achieving our full year revenue and EPS guidance. We got off to a solid start on this front with total revenues of $43 million for the first quarter. This is 27% increase year-over-year as reported and a 9% on a pro forma basis accounting for the On-X acquisition and HeRO and ProCol divestitures. On a GAAP basis, gross margin for the quarter was 64%, slightly ahead of our expectations. And on the bottom line, we delivered adjusted EPS of $0.10. Our second key initiative for 2016 is realizing the potential for the On-X business with a goal of delivering double digit percent or higher compounded annual growth over the next five years. As I mentioned, we reported $6.7 million of On-X revenue in the first quarter and the business delivered $8.3 million for the…

Thanks, Pat. This morning we reported our results for the first quarter of 2016. Compared to the first quarter of the prior year, total company revenues increased 27% to $43 million. This was primarily driven by the acquisition of On-X. On a pro forma basis, revenues increased 9% compared to the first quarter of last year. The pro forma revenue increase was primarily driven by the improved performance in our vascular tissue business, BioGlue, On-X and PhotoFix. On a geographical basis, North American revenues which includes the United States and Canada, were $32.9 million, up 19% year-over-year driven largely by the acquisition of On-X. On a pro forma basis, North American revenues increased 8%, primarily driven by increases in vascular tissue revenues, On-X and PhotoFix. Revenues from our European region were $6.8 million, up 68% year-over-year, primarily as a result of the acquisition of On-X and commencements of our direct sales operation in France in October 2015. On a pro forma basis, revenues from this region increased 16%, driven primarily by an increase in BioGlue revenue. And finally, revenues from Asia-Pacific and Latin America were $3.4 million, up 55% year-over-year primarily as a result of the acquisition of On-X. On a pro forma basis, revenues from this region increased 3% year-over-year. I would like to spend some time focusing on individual product lines and specifically on On-X tissue processing and Bio-Glue which combined account for about 90% of our total revenues. As Pat mentioned earlier, we've made significant progress in our tissue processing business where both revenues and gross margins are improving. In total, tissue processing revenues increased 11% for the quarter compared to the prior year. Vascular revenues increased 23% year-over-year on an 8% increase in unit shipments. Cardiac revenues decreased 4% year-over-year on a 4% decrease in unit…

Thanks, Ashley. So as you've heard today, we're off to a very solid start for the year and remain confident in our strategy to grow the company. The company is on track towards delivering on all of our key initiatives for 2016. I previously discussed our senior management team and the key additions we've made over the last year. They have collectively brought with them a wealth of experience to CryoLife. They've been instrumental in development of our strategic initiatives. The investment to build such a knowledgeable team has been an important factor in our successful start to the year. So to summarize, CryoLife is well-positioned. We've built a critical mass of competitive products supported by an experienced sales team. We have a compelling new product opportunity with On-X and finally we have clear goals and objectives that strive to make CryoLife a higher growth and more profitable company with a leadership position in the cardiac surgery market. Last, I continue to remind all of our employees that our products help people each and every day across the globe and thank you for making the quarter a successful one. With that, we will now open the lines for questions. Operator, please proceed.

[Operator Instructions]. The first question is from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

So I'll get a couple quick ones in. So can you clarify as far as HeRO and ProCol, any ramifications on the income statement for Q2 and forward or are they both zeros for Q2 and forward?

No, we expect to have an additional approximate $1 million related to HeRO and that's really just you know contract manufacturing for Merit while they move that operation to their facility in Utah. Other than that, that's it.

Okay. So $1 million HeRO revenue for the second quarter?

That's correct.

Okay, ProCol is zero for Q2 and forward?

Right.

And Pat, could you review the footprint now with the combined sales force altogether? You said 50 or 51 U.S. direct reps for cardiac, vascular, On-X altogether and 25 X-U.S.?

Yes, that's right. Fifty-one, we have 51 territories right now in the U.S. And as I commented, that was a combination of the CryoLife cardiac surgery sales force, the CryoLife vascular surgery sales force and the On-X sales team here in the U.S. So that new combined entity is 51 territories. In Europe, there were no direct reps for On-X in Europe, so that's just the existing channel that we had with the most recent addition of the French team that we added kind of in the October timeframe. So that's about a 25-person team.

And one more if I may. Could you call out and go into a little bit about the vascular tissue market? It seems like it's a steeper trajectory than we previously anticipated. Is that because of -- is that being demand driven or it's a function of a few of the aspects that Ashley reviewed, such as going direct in France?

Yes, so we don't sell tissue in Europe, so the French direct didn't have any impact on tissue. You know, one of the things I've been saying kind of over the last six to nine months is that there is a tremendous amount of demand for the homograft products, both in the heart valves and in vascular tissue. And one of the things our customers had been requesting for a long time is very long saphenous veins for -- they're doing these long revascularization procedures from the groin down to the ankle. And our ability to -- all the improvements we've made in the TPL lab, in our procurement group, has really contributed to that. So we've got a tremendous amount of supply and we've been able to meet the demand and you know a 23% growth on vascular tissue was pretty impressive in the quarter, particularly given the cost improvements we've seen as well.

Okay. Were there price increases in the first quarter?

We had some nominal price increases in the middle of last year, but not in the first quarter of this year.

The next question is from Jason Mills from Canaccord Genuity. Please go ahead.

This is actually Jeff Chu filling in for Jason. Pat, I was hoping you could comment briefly on your sales force productivity. I understand there's a lot of moving pieces here, but I'm just curious on what type of target level have you set for your team over the next several years and how do you see that trending through the balance of this year?

Yes, so I mean again, as we commented in the comments that were just provided, I mean there was a lot going on in the first quarter. I mean to acquire a company and to merge three sales forces, depending on where the sales rep came from, whether they're, so for example, a CryoLife cardiac rep to transition to selling aortic mechanical valves was not very steep. They've been selling aortic homografts for years. So we had significant training. We had two different training sessions. We've had multiple different kind of, you know, webexes at night. For example, the vascular team who has been previously associated with the vascular surgeon had what I call a steeper learning curve. So I mean to me this has been, you know the first quarter we combined three sales forces. They've got their new territories. They've got their new comp plans. And we're now kind of, as we commented, just getting rid of some of these remaining distributors. In the second quarter we'll have full access to the U.S. market and the same in six countries in Europe. Now, this is going to kind of go in phases. We're going to, as we move through the integration, we're now aggressively going to be focusing on opening new accounts and taking market share. So that's really going to be the focus going forward. And I mean we've stated our objectives for this team which is, you know we're expecting double digit On-X revenue over the five years on a compounded basis, so that's how we're going to measure them.

And in terms of gross margin, I was wondering if you could calibrate our expectations going forward. How should we think about the cadence as you move through this year and next and what are some of the headwinds or tailwinds that you expect?

Yes, and maybe Ashley can chime in at the end here. I mean so you see in the comments where you know we reported 64% gross margin against kind of a stated guidance of 63%. When you adjust for the purchase accounting that goes along with the On-X transaction, that will flow through our P&L, you know through the rest of this year. And if that step up did not happen, we'd be a more of 66% gross margin. If you think about multiple different factors here, number one, you know the On-X product line, when it's direct, carries about a 90% gross margin in the U.S. So as we're successful in opening new accounts in the U.S. with On-X, that should drive our margin. Going direct with On-X in Europe is going to drive our gross margin. And as we kind of bleed through that purchase account, that's going to drive the margin. So yes, I think as all those things kind of come through as we go into 2017, I would expect our margin to be looking even stronger.

[Operator Instructions]. The next question is from Joe Munda from. First Analysis Securities. Please go ahead.

Pat, I just want to touch on a comment, a few comments you made on the product side. You talked about increasing supply of high demand cardiac tissue. A, can you kind of walk us through how you do that? And B, can you talk about supply in general as far as donor tissue is concerned?

Yes, so I mean I think one of the things we've, you know over the last year we've talked about, we had a bottleneck in our tissue processing facility and we actually had to stop procurement groups from even sending us any tissue because we couldn't process it. We've, you know the leadership team here and the people in that area have done a fantastic job in really turning around the kind of productivity. So not only are we not accepting new tissue, we've actually gone out and aggressively pursued new procurement groups. So we've had capacity and we continue to be aggressive on bringing on new groups. So I think that's really the key here is that we've shown what we can do on the vascular side when we get the procurement and kind of the throughput on the yields and we're now heavily focused on the cardiac side to make sure we're getting the aortic and pulmonary valves. And that's going to, again is going to be a big focus of ours going into -- as we go through the rest of the year.

How much excess capacity do you think you have as far as the tissue process?

I mean it varies. I mean we track it pretty closely, but I mean we probably have a 15% capacity on any given day. Sometimes it's at 100%, but we flex. You can't really control when it comes in, so we have to be able to flex the model. Sometimes you may run at 110%, sometimes you might run at 75%, but we've got capacity and that's the important point.

Okay. Just two quick other ones here. PhotoFix, you talked about internal manufacturing about 18 months. Are there any costs associated with that or is the infrastructure in place already?

There will be some capital expenses.

Yes, I think the total capital to get that up and running is going to be less than $1 million.

And then just the operating costs which I don't think is significant to basically move the manufacturing from Denver to Atlanta.

And we're going to fit it into our existing footprint here at our corporate headquarters.

And I guess, Pat, last question for you. How long do you think it will take to be fully integrated and have everything up and running the way you want it to be up and running with On-X and the movement around here of the distributors? Just to give us a sense of time.

Yes, to be honest, I mean I'm actually pleasantly surprised about how well the organization executed with everything that was going on in the first quarter. Not that it isn't a great team, it's just it was a lot. When you add up the acquiring On-X, divesting HeRO, divesting ProCol, exercising the acquisition right on PhotoFix, merging three sales forces in the U.S., shutting off distributors in the U.S., going direct in six countries in Europe, I mean it was a lot. And so, you know, May 1st which is coming up, we're going to have pretty much full access in Europe, except for Switzerland. I think Switzerland doesn't go live until June. But we're direct and selling right now to all of our distributors in those five countries in Europe with our dedicated team. In the U.S., over the next week or two, we will have access to all of those stocking distributor accounts. So our field team by kind of mid-May is going to have access to all of our direct markets which is well ahead of where we thought we were going to be. And I think each kind of month and quarter that goes by, the team will strengthen. We'll continue to train. We'll continue to be aggressive in targeting accounts. So I mean I think every quarter that goes by, we can expect to be stronger.

Okay. And if I may, one quick follow-up. As far as being a cardiac focused business, as far as vascular tissue is concerned, any chance of a divestiture there or is that a key piece of keeping cardiac and vascular together?

No. I mean one of the things about the vascular tissue, I mean we're in the major heart centers and in fact we have several cardiac surgeons that use vascular tissue. So it's not a huge stretch. I mean it's not like selling, you know, something to an E&T surgeon, I mean where you're in a totally different part of the hospital, a totally different procedure. So the vascular tissue is not very far away from what we do on the cardiac side and we think it's a very strong product line, as we've just showed with the growth and the margin improvement. So we don't have any plans in the near term for that.

There are no more questions at this time. I will like to turn the floor back over to the management for closing comments.

Well again, thanks everybody for joining the call. And you know, we were very pleased with the first quarter and we're committed to delivering the guidance. And I feel like we're very well positioned, as I just said, particularly on the channel side and we're going to be aggressive in going after accounts. So we look forward to updating you with our progress in the next quarter. Thanks for joining.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participating.