Greetings and welcome to the CryoLife Fourth Quarter and Year-End 2018 Financial Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host; Lynn Lewis of the Gilmartin Group. Thank you. You may proceed.

Good morning. This is Lynn from Gilmartin Group. Thanks for joining the call today. Joining me from CryoLife management team are; Pat MacKin, CEO; and Ashley Lee, CFO. Before we begin, I'd like to make the following statements to comply with the safe harbor requirements of the Private Securities Litigation Reform Act of 1995. Comments made on 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 those forward-looking statements. Additional information concerning certain 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 we issued last night. With that, I'll now turn the call over to CryoLife's CEO, Pat Mackin.

Thanks, Lynn. And good morning, everyone, and thank you for joining us. As you're going to hear today, 2018 was a highly successful year for CryoLife, as we made meaningful progress toward becoming the leading provider of solutions for people suffering from aortic disease. We now operate from a position of strength, due to the quality and breadth of products, our experienced sales team and adept customer support. This morning, I will outline why we expect CryoLife will be even more -- in an even stronger position in the coming years without needing to make a single acquisition. Simply put, we believe our story will keep getting better as we advance our pipeline and execute our strategy. We expect our steady growth to continue and our addressable market to increase by over $1.5 billion due to anticipated regulatory approvals and from geographic expansion we aim to deliver. As we reflect on 2018, our team made significant progress toward the goals we set for our year. We generated topline growth of 11% for the full-year 2018 versus 2017 on a non-GAAP basis, and 10% on a constant currency basis. We completed the integration of JOTEC. We leveraged our global commercial organization. We enhanced our commercial leadership team in Latin America and Asia-Pacific. And we advanced both our product pipeline and our clinical programs meaningfully. Turning to our operating performance in the fourth quarter, CryoLife closed 2018 like it began with solid revenue performance, led by double-digit organic growth from our JOTEC and On-X product lines. Revenue in the fourth quarter was $67.8 million, up 8% on a non-GAAP basis and constant currency basis. Despite revenue exceeding our expectations, our operating expenses were more than anticipated in the fourth quarter due to the acceleration of spending on our product pipeline and increase…

Thanks Pat. I'll now review the results for the fourth quarter as well as our financial outlook. Total company revenues increased 28% to $67.8 million when compared to the fourth quarter of the prior year. Q4 total revenues grew 8% on a non-GAAP and constant currency basis compared to the fourth quarter of 2017. Q4 North American revenues were $37.9 million, an increase of 5% year-over-year. The increase was driven by 13% increase in On-X and a 6% increase in tissue processing. Q4 revenues from our EMEA region, Europe Middle East and Africa were $23 million, an increase of 11% and 13% on a non-GAAP basis, compared to the prior year. Revenues from Asia Pacific and Latin America were $6.9 million for the fourth quarter, an increase of 28% and an increase of 9% on a non-GAAP basis compared to the prior year. Looking at individual product lines. On-X revenues for the fourth quarter were $11.3 million, an increase of 13% over the fourth quarter of 2017. Q4 On-X revenues increased 14% on a constant-currency basis compared to the fourth quarter of 2017. JOTEC revenues for the fourth quarter were $16.7 million. Non-GAAP JOTEC revenues increased 17% compared to the fourth quarter of 2017 and 19% period-over-period on a constant-currency basis. BioGlue revenues in the fourth quarter increased 1% year-over-year to $17.9 million. North American BioGlue revenues were $9.4 million. OUS BioGlue revenues increased 3% year-over-year to $8.5 million. BioGlue revenues for the fourth quarter of 2018 increased 7% in the Europe, Middle East and Africa region and decreased 1% year-over-year in Asia Pacific and Latin America. Tissue processing revenues for the fourth quarter were $18.5 million, an increase of 4% compared to the fourth quarter of 2017. During the fourth quarter, vascular revenues and cardiac tissue processing revenues increased…

Thanks, Ashley. So, in closing, we had an exceptional 2018, in which we achieved many product development and regulatory milestones and delivered strong financial performance. I would like to thank all those at the company who made 2018 such a success. Your hard work literally improves the lives of people everyday around the world. Our mission is straightforward. If we execute on the goals and objectives I've outlined today, we expect to be a significantly larger company with a stronger leadership presence in the markets we serve. Fortunately, we have all the pieces in place including a strong leadership team to drive the process. We entered 2019 well-positioned to continue delivering solid and sustainable financial performance. So given all the opportunities for growth I've outlined this morning, it's easy to understand why we are so optimistic about our future days. With that, we'll now open the line to questions. Operator, please proceed.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Jason Mills with Canaccord Genuity.

Thanks for taking the question, Pat and Ashley, good morning. Can you hear me Okay?

Yes, yes, good morning.

Great. Good morning. So, Ashley, you sort of got into the first -- line of question, I'd like to get in to which is sort of the earnings profile of the company. We all knew because you guys have been talking about the MDR mandate and necessary spending there, we just didn't know how much it was going to be. So maybe run through more broadly, Pat, the operating expectations, earnings expectations for the company on a pro forma basis, it looks like that $3 million if I tax it – what tax rate I had in my model, is fairly meaningful, 10 -- 10-ish, give or take, we don't know how you calculate it. But generally speaking, looks like the earnings profile of the company could be quite a bit higher without it. And I'm wondering, just as we look into 2020, if that's sort of the baseline we should be thinking about, excluding that $3 million and sort of – assuming the midpoint of your range?

Yeah, let me take the macro question, I think this is a really important one, and I think for investors, and I'll will have Ashley, if there's follow-up, I'll have Ashley, maybe he can get into more specifics. So, when I look at the company today, and I go back, when I got here, we had 10 reps in Europe and a $20 million business, and through the acquisition of JOTEC and going direct and all the things we've done over the last four years, we now have 80 direct reps and $100 million business. And it required investment along the way to get there, but basically, the European infrastructure is now set for us to leverage with our pipeline. The same could be said about the U.S.. When we acquired On-X, we merged sales forces, we built those sales forces. So what we've basically been doing is a step-by-step approach to investing in our channels. So our US is pretty solid and fixed, Europe is pretty solid and fixed, we have basically wide open markets in Asia-Pacific and Latin America. We are choosing to invest a couple of million dollars to build out those channels, but once those are built out, we basically have a global infrastructure that is somewhat fixed, and that comes to the next point, which is the pipeline. We have 13 products in our pipeline that are going to add $1.5 billion to our total addressable market. And as those channels gets fixed in Asia-Pacific and Latin America over the next 12 months to 24 months, the entire global footprint can then be leveraged on every single one of those 13 new products that we launched. So I think what you're going to see and again this goes back kind of our five nearly year-over-year…

Terrific. That's very helpful color around sort of the longer-term expectations as you'll operate the business and build it. Wanted to move to JOTEC, obviously – and you mentioned it in those remarks, the importance of JOTEC not only from the standpoint of having products that you like and their growing, but also the offerings in the business, strength that you have in Europe relative to where it was when you came onboard. So maybe spend a minute and level set us on the JOTEC business in light of the fact that you have several new products coming in 2019, you're now starting to talk about your regulatory plans and strategy for the US, which is obviously couple of years away, but getting closer. And maybe just talk about the trends across your product line buckets within JOTEC? What you're seeing, not only from a volume perspective but an ASP perspective and a competitive perspective? As you start to get into these new markets, how you expect JOTEC to contribute to Latin America and Asia-Pacific? Just trying to get a sense for whether or not on a go-forward basis and you obviously talked about 2019, but over that five-year period time, what sort of contributions you expect from a growth perspective from JOTEC? I think it's an important part of your business.

Yeah, no, absolutely. And I couldn't be more pleased to be honest with you. I've done a number of acquisitions in my carrier and as you well know having watched the number, there's always kind of trips and kind of stutter steps because of things you didn't know about or things that happen. A year after, we acquired JOTEC in December 7th of last year, so we've had it for a full year now, plus a month or so. I mean, it's been, it's frankly been flawless. We delivered 24%, 25% top line growth. We've had no turnover of the executive team. We've had no turnover in the field, and the pipeline is very robust. And so, I think, there's probably three things that I would watch with JOTEC. Number one, starting this year, we've got three new products coming. We have a next-generation Frozen Elephant Trunk, we've a next-generation Thoracic Stent Graft, and we have a next-generation, and actually the first ever off-the-shelf branched thoracoabdominal device, which we think is going to be a kind of a game changer. Those are all planning on being launched this year. Two of those products are being submitted to the CE Mark this month and the other one will be submitted, I think, in Q2. So, the first thing you're going to see is those three products as they get into the European channels, which is a, it's an 80% channel now, you're going to start to see the impact that that fixed kind of footprint has on the, with those new products. The second thing you'll see with JOTEC is our investment in Asia-Pacific and Latin America. We have a tremendous opportunity in China. We already have JOTEC products approved in China. We have JOTEC products approved in many markets in…

Very helpful color. I'll re-queue. Thanks, Pat.

Thank you. Our next question is coming from line of Brooks O'Neil with Lake Street Capital Markets. Please proceed with your question.

Good morning, guys. I was just curious, if you could describe kind of when you made the decisions to accelerate your spending during the fourth quarter. And would you describe those decisions as sort of strategic opportunities that you found, that you just decided to make the investment in or was it something different than that? Thanks a lot.

Yes. I would say the -- yes, I'll talk about kind of 2019 and then I'll come back to Q4. So we had a meeting with our board in October where we talked about the 2019 plan. And we obviously knew where kind of the Street was with EPS and we saw the opportunities in front of us. And we feel in the long-term value creation for our shareholders, the return on investment is just too great with these channel investments and the R&D pipeline. We could be much more profitable, we could kind of a constrain our R&D pipeline, we could not invest in Asia-Pacific and Latin America, we could deliver way higher EPS. Working with the Board and we all felt with management that, for the long-term shareholder value creation, this company has got so many opportunities. I mean, no company of this size has 13 products in their pipeline, and it's a low-risk pipeline and a high return pipeline. And like I said, we have nascent commercial markets in Latin America and Asia-Pacific, we have a handful of people. So with the support of the Board, they fully agreed that we needed to invest long term in the company and this is a building year for us. And as I said earlier in my first comments with Jason, we are still committed to the financial metrics we talked about, delivering high single-digit growth, and as the pipeline comes forward, we think that will accelerate. We think we can get gross margin expansion of 1 point per year. And we think, because this infrastructure once in place, is largely fixed, that as those pipeline products come out, you're going to start to see the operating margin of the company accelerate through the five-year period. So if I come…

Thank you.

Thank you. The next question is from the line of Suraj Kalia with Northland Securities. Please proceed with your question.

Good morning, Pat. Good morning, Ashley. Can you hear me alright?

Hey, good morning, Suraj.

Pardon the background noise, if any. So Pat, three buckets of questions. First and foremost, can you quantify for us the cross-selling efforts and the results for CryoLife and JOTEC in Europe? Also, can you help us quantify the cross-selling between CryoLife and On-X in the U.S.?

Yeah, so, one of the things that -- actually just I was at the -- we had an international sales meeting back in January, so I was actually with the team in Europe and one of things that's interesting, if you think about it, trying to capture cross-selling in the first year is difficult because you didn't have a prior year comparative with your new structure. We now have a kind of a prior year comparative to the existing structure. We'll be able to better manage I'll tell you this year. I will tell you BioGlue is an example. So we -- one of the cross-selling opportunities between JOTEC and CryoLife was BioGlue, and we grew BioGlue 8% in Europe this year -- or in 2018. That was probably twice the growth rate of the prior year. So I would tell you that adding that additional channel clearly benefited, it was a benefit from cross-selling. That's also an easier product to note from a training requirement standpoint. We had the full vascular teams trained in -- a year ago. I think the second opportunity was kind of going the other way, which is the legacy CryoLife cardiac surgery reps started selling the Frozen Elephant Trunk from JOTEC and we've also seen a pickup there, although that's a much more difficult kind of a from a training requirement standpoint. So I think we'll actually particularly when we get the new product, I think we're going to see that accelerate rapidly. We're probably a little behind on the technology there. So I think you're going to see the benefit of that, once we start to sell our new Frozen Elephant Trunk. As far as the U.S., kind of the On-X kind of CryoLife cross-selling, I would tell you that the two things -- I would look at two metrics, I would look at is, we grew On-X 20% this year, year-over-year. Number two, we grew cardiac tissue valves 10%. And again, I'm talking about 2018. Those two metrics, I would tell you -- would tell me that there some serious cross-selling going on. I also think that as the data continues to come out on the Ross procedure, and as we start this PROACT 10A trial, CryoLife is extremely well positioned to be the market leader in patients undergoing aortic valve surgery under the age of 70. So we think there's a lot of synergy between the SynerGraft, Ross procedure and the On-X aortic valve with the PROACT 10A trial to literally we have -- we think is what is the best offering for a patient under 70 years old for getting aortic valve replacement.

Got it. And, Pat, forgive me, if this is an unfair question. In my experience over the last two, three years, you guys, unlike others, you guys don't throw around flashy words and you guys get down to brass action building a biz. That having said, we know in a couple of months PARTNER III results are going to come up. We know the age delta between mechanical and the transcatheter valves. Do you think any change in messaging is required by the On-X sales force, if any? And at the same time, have you all factored any impact whatsoever from PARTNER III, obviously, the trial is enrolled although approval is not going to come till next year. Just curious how you all are thinking about more of the messaging impact, if any?

Yeah, I mean we've talked a lot about this on previous calls as well. I mean this is a call that Ashley and I are -- a question we get with investors often in, you're trying to predict the future, I mean, it's -- people have different opinions of what's going to happen, what the data is going to be. And I just think there is such a gap between the average age of TAVR patient and the average age of a On-X aortic valve patient that even with that data, the average age of the On-X aortic valve is 58. The average age of a current TAVR patient I think is 78, maybe higher. You probably know the data better than I do on that. So you got a 20-year gap. It is not just the age, right. So let's say the PARTNER III data comes out and the age starts creeping down. The problem is you don't have long-term data for TAVR. And so every year you go lower, you're making a bet for the patient that valve is going to last. So you tell me a 58-year-old is going to get a TAVR valve. How long is that valve going to last and then what do they do on the next operation? So I just think again, we'll see what the data looks like. It's hard to comment because I haven't seen the data. But then I also say you're asking the question in the backdrop of a PROACT 10A trial that's about to start where we can offer a patient under the age of 70 one operation and Eliquis for the rest of their life. I'd love to hear about what the TAVR companies are saying about the data coming out on the requirement to actually…

Thank you. Our next question is from the line of Joe Munda with First Analysis. Please proceed with your question.

Good morning, Pat and Ash. Can you hear me okay?

Yeah.

Hey. Good morning, Joe.

So first off, I just wanted to touch on the pipeline. A lot of moving pieces here, a lot of excitement that I just wanted to get some clarity maybe on the cadence of R&D going forward. Obviously probably picking up, but I was wondering if you could give us your thoughts as well as what to expect in regards to the $3 million related to the med device framework in Europe, how that will play out over the year?

Yeah. So I think one of the things that for investors that's a real positive is that those 13 products that I mentioned, right, so I'm not going to go back to the laundry list, but we've got 13 products in the pipeline. We are able to fund that pipeline -- again, I'm talking about over a five-year period and roughly keep our R&D spending around 10%. I think that's a big deal. I mean that pipeline is about $150 million investment over the five years, but we get access to a $1.5 billion opportunity. So, we're not spending crazy percentages on our R&D because of our top line continues to grow, we're able to fund our R&D pipeline this year actually under a 10% R&D spend. And I think, again, some years it may go up a little bit, it may go down a little bit, but that's another piece of the income statement we're going to leverage over time because as we continue to build this business and grow this top line, our R&D spending can also come down, which will contribute to the 20% operating margin. So, again, that pipeline is affordable because the size of our business, and even keeping at 10% or a little bit lower. As far as the MDR throughout the year, I mean it’s -- I don't know that we've given kind of breakout to that.

Yeah, I mean, I think we expect R&D expense to be somewhat level quarterly throughout the year with the exception of -- with the final work that we're doing to get the BioGlue China submission and the work that we're doing on the PerClot PMA submission. The first and second quarters could be a little bit higher from an R&D standpoint than the last two, but overall, as Pat mentioned, we are estimating high single digits up to 10% of revenue for R&D in 2019.

Yeah, I think also -- I think Joe, the other thing that's I think really important for investors is, we don't have to do another acquisition. We don't need to raise money. We don't need to issue shares. We don't need to do another acquisition, okay. I'm not saying that we're not going to, I'm just saying we don't need to. You can look at our pipeline as an acquisition. It's a $150 million investment over five years, but I can keep my R&D spend under 10% and probably decelerating over the five years, which should contribute to the operating margin, but we got 13 products that, by the way, it's a very low-risk pipeline, lots of these products are either approved in other markets, it's just doing the trials and getting a move to new regions or new geographies. So we feel very confident with this pipeline, and as I said before, as this channel investment solidifies in 2019 and 2020, particularly in Asia-Pacific and Latin America, we don't have to really increase our channels after 2020, and that's when all the product starts hitting. It will drive margin, it'll drive operating margin. So, again, we're building the company, and I think we've shown what we've done with On-X in the U.S., JOTEC in Europe. This is the next piece of the puzzle and this thing is very well put together in the next 24 months.

Okay, that makes sense. Thank you for that. The other -- two other questions I had here, based on the first quarter guidance that you're giving, from my model, it looks like expecting a strong ramp in the second half of 2019 and that's -- I'm assuming as a result of the new product launches. But is there anything else there may be in regards to tissue -- tissue had a strong year this year, you're talking about a lot of excitement about Ross procedures. Maybe a little bit of clarity, are you expecting a ramp in the growth in the second half of this year? I'm just looking for clarity there.

Yes. So, if you go back, and I know we went through it quickly, but if you look at the catalysts for 2019, is that we've got like seven or eight catalysts for 2019. The first three are the new JOTEC products and those are hitting in the second half, so clearly, those are going to start -- as soon as those get approved and we get them rolled out in the market. So, the back half of 2019, we will start to see accelerated growth with JOTEC with those three new products. We're starting to go direct with BioGlue in Brazil in the second quarter. We have the new distributors in China for both for our JOTEC portfolio and our On-X portfolio in the second half of the year. So, we clearly have -- we've got the PROACT 10A trial starting kind of in the first half, but starting to get momentum in the second half. So, clearly a lot of these catalysts are starting to hit kind of mid-point of the year. So clearly I think the back half, just inherently because of all those catalysts kind of coming to fruition, are going to drive the back half.

Okay. And then I guess on the tissue business, you had been forecasting in the past, mid-single-digit growth, but it appears cardiac is really taking hold. Is this something -- is this a trend we're going to expect it to continue in 2019 and going forward?

Yes. So, I think we're pretty transparent on the tissue. We basically said, we thought it would grow kind of mid-single-digit and so we had internal goals like, I would say, call it 5% and we grew almost 8%. I was very pleased to see the cardiac tissue business up 10% last year. I made some comments earlier about the Ross data. There is a big paper and symposium at the AATS Meeting in May, 600 patients with 20 years follow-up. There is a resurgence of the Ross and we are the market leader in that segment. So I think that -- if that's how that data is received could be another positive for the pulmonary valve segment of our business. The second is we've -- and we mentioned this over the calls over the years, we've got a 2,000-patient trial going on at the Cleveland Clinic for our aortic tissue valve. That data should be coming out this year. So those two things could not only be kind of keep us in the mid-single, that could actually bump us up and we'll see how that unfolds. But we are actually very encouraged by what we're hearing about some of the data coming out on our tissue valves.

Okay, thank you.

Thank you. It appears we have no further questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.

Well, listen, I want to thank all of the -- everyone who joined the call this morning. And as hopefully you can hear from our enthusiasm that we are excited about what we're doing with the company. I think if you've been with us for the last four years, this company has transformed. And I think probably the best the most important takeaway message is that we have made the decision to invest in our pipeline and we don't need to do an M&A, we don't need to issue new shares, we don't need to issue new debt. Our debt is coming down and we are investing in two things. We're kind of fixing our international channels outside of Europe and the US, so Latin America and Asia-Pacific is requiring some investment. As those things take hold, those will be fixed at our income statement without a lot of need for additional investment as those annualize in 2020. And we've got a pipeline of 13 products with the market -- total addressable market of $1.5 billion. And we can do that by spending less than 10% in R&D over the next five years. And what that will give you is, we think we can give investors high single-digit growth as we do this, accelerating as the pipeline matures, we're going to try to get one point of gross margin per year and we think as those channels get fixed in 2020, as you move to the second half of the five-year plan that you will start to see our operating margin move up into the 20% range. So again, I think, we think this is a great company and we've got lots more to do, but we're extremely excited about our future and we appreciate all the support from our investors. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.