Greetings, and welcome to the CryoLife First Quarter 2019 Financial Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Lewis from the Gilmartin Group. Thank you. Ms. Lewis you may begin.

Good afternoon. This is Lynn Lewis from the Gilmartin Group. Thank you joining the call today. Joining me from CryoLife's 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 CEO, Pat MacKin.

Thanks, Lynn. And good afternoon everyone and thanks for joining the call. As you'll hear today, we're off to a great start in 2019. I'd encourage you to measure us in two ways. First, our near term quarterly performance; and second, the progress we've made against our clinical and R&D programs. I'm happy to report that we met and exceeded expectations on both fronts this quarter. You may recall from previous earnings calls that we expect to drive consistent growth from our current portfolio, while at the same time we work towards a series of product approvals, new market introductions and product enhancements. Some of these initiatives have the potential to dramatically change the growth profile of the company. Our first quarter once again illustrates our ability to simultaneously produce strong organic revenue growth and achieve key development milestones including: one, we submitted regulatory approval for BioGlue in China; two, we completed enrollment for the U.S. PerClot clinical trial; three, we submitted for CE Mark the E-nya thoracic stent graft; and four, we submitted the E-nside branch thoracoabdominal stent graft. I will touch on each of these in more detail throughout the call. Regarding organic revenue growth, total revenue for the quarter was $67.5 million, reflecting year-over-year growth relative to the first quarter of 2018 of 9% on a GAAP basis and 11% on a non-GAAP constant currency basis. This strong consistent growth was driven primarily by our JOTEC and On-X product lines. For the quarter relative to the first quarter of 2018, JOTEC grew 10% on a GAAP basis and 18% on a non-GAAP constant currency basis, as our JOTEC product line continues to take market share. We expect this trend to continue throughout 2019 given how our JOTEC product stand out from the competition. We're also the only…

Thanks, Pat. I’ll now review our results for the first quarter as well as our financial outlook. Total company revenues increased 9% to $67.5 million and grew 11% on a non-GAAP constant currency basis compared to the first quarter of 2018. We saw a year over year revenue increases across all four of our major product lines. Looking at our product lines, on-X revenues for the first quarter increased 14% on a GAAP basis and 15% on a non-GAAP constant currency basis, both compared to the first quarter of 2018. JOTEC revenues in the first quarter increased 10% on a GAAP basis, and 18% on a non-GAAP constant currency basis, both compared to the first quarter of 2018. This large difference in reported versus constant currency growth rates is due primarily to the year-over-year weakness in the euro versus the U.S. dollar. BioGlue revenues in the first quarter increased 8% on a GAAP basis and 10% on a constant currency basis, both compared to the first quarter of 2018. Revenues were particularly strong in international markets, including a 7% constant currency increase in our European region, which resulted from cross selling efforts from our enhanced direct distribution channel. Total tissue processing revenues for the first quarter, increased 4% compared to the first quarter of 2018. During the first quarter, cardiac tissue processing revenues increased 10% and vascular tissue processing revenues decreased less than 1% year-over-year. Cardiac tissue processing revenues were favorably affected by recently published long-term performance data of our tissue valves. Vascular tissue processing revenues decreased primarily due to a decrease in average sales prices, resulting from competitive pressures. However, we do expect vascular revenues to be favorably affected, following recently implemented initiatives to increase near-term supply. Our gross margins were 66% for the first quarter, which is slightly…

Thanks, Ashley. In closing, we had a very successful start to the year putting the business squarely on track to produce high single-digit top line growth in 2019, equally important with our progress advancing our strategic long-term growth objectives. Well, that important work doesn't show up on the top line today, it is critical to our future success and should take CryoLife to the next level. Our robust pipeline and clinical endeavors have increased the company's total addressable market to $3.5 billion. We arrived at that forecast after considerable market analysis that is why we believe it's important to track not only our quarter-to-quarter financial performance, but also our development programs. If we execute on them, which we are confident that we will, we expect to be significantly larger and more formidable company in the coming years. We're getting close to the expected launch of the first of our next generation products with JOTEC and planning to introduce new products and product enhancements in key markets for years to come. As a result, we offer investors an excellent balance of consistent near-term performance and exciting long-term growth opportunities without having to make another significant acquisition. Today we oversee a highly differentiated product portfolio backed by an experienced sales team. We're doing an excellent job capitalizing on our competitive strengths to take market share. Moreover, our sound financial position gives us the ability to execute on our transformational pipeline of clinical and R&D programs. Our decision to become more focused in deeper in our given market is yielding the results we had expected. As such, we believe are in excellent position to remain a market leader in the select areas that we focus on. As we introduce new offerings, we will further solidify our leadership position in select markets for the treatment of aortic disease. Our strategy is clearly working, our recent acquisition is performing as or better than expected. Our sales network has been significantly strengthened and we have a clear path towards transformational growth opportunities. We understand the execution of our plan as paramount and we've assembled a proven leadership team to see it through. The better you get to know the company and more you'll understand our best days lie ahead. Lastly, I'd like to thank all of our employees who help make our first quarter success, your important work not only benefits the company, but also the many people and their families around the world. With that, we will now turn the line over to the operator to open for questions.

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

Hi. Good afternoon, Pat and Ashley. Can you hear me okay?

Yes. Hear you fine.

Yes.

Great, and congrats on a great start to 2019. Pat, first question is asked sort of from the perspective of geographical representation of your business U.S., international and really we'll ask you to sort of touch on your strategy from a sales perspective as well as a product pipeline perspective. And then I have a follow-up or two if you don't mind. But you grew this quarter obviously with JOTEC having a great quarter. You grew really a little over 10% international, under 10% U.S. to sort of net out your 9% report, 11% organic. And it sounds like over the course of the next several quarters, the products that you'll be bringing to market, new products bringing to market and really the trends – the stronger trends in your business or outside the U.S. Could you talk about that and your – the strength outside the U.S., as well as what you may be doing before, let's say On-X, 10A and PerClot can have an impact on your business in the U.S. to maybe further augment your U.S. growth profile?

Yes. And I think one of the things that is just inherent in the current model is, we don't have any of the JOTEC products approved in the U.S. and we have JOTEC approved obviously everywhere in Europe, and then we're starting to get approvals around the world, in Asia Pacific, Latin America, which is benefiting the growth. So we fully in our planning for the year in our strategic plan. We're expecting more growth in the international markets than the U.S. just because of the portfolio. We do think we can boost growth in the U.S. with the items you mentioned, the U.S. approval of PerClot will obviously be a big deal, as well as we think PROACT 10A, once that trial is approved and the word gets out about what we're doing there will be a big deal. But we pretty much – we actually had a very good quarter in the U.S., but just again, given the product lines and what we have in the different markets, we're going to be expecting faster growth outside the U.S. on a consistent basis.

Okay, great. And then sort of segwaying into that discussion about the U.S., it certainly wasn't lost on me the spending in the quarter on business development activity. I know that you've got a lot on your plate, you've executed two relatively large deals, two large deals as the company's history in relatively recent past. But are you seeing assets out there that are notable and that fit within your framework from evaluation margin and growth perspective more so today, than you've seen in the past? Because I don't believe I’ve seen the call out such as this in recent quarters.

Yes. I mean there's always – we've said that we would be opportunistic as it relates to M&A. I can tell you that there's a handful of assets that are available out there and we're always looking, but I can tell you that, based on kind of where we are right now with our five year plan and Ashley mentioned this in his comments, we really don't need to do any acquisitions. We have positive cash flow, we can service our debt, we don't need to raise shares, we can support our business model with – and we're actually generating cash. So we don't need to do any deals. That being said, I mean, we would always be interested in potentially, I think more interesting as a tuck-in that could potentially boost our growth rate even higher. The real advantage we've got now is we've kind of around the world, we’ve gone direct in many countries in Europe, we're putting infrastructure in place in Asia Pacific, we're putting infrastructure in place in Latin America, we're going to have a 180 direct reps at the end of this year. And if you can bring a tuck-in once you get your approvals and I can sell it by 180 direct reps around the world, it has amazing pull through on your P&L. So I think from a – my message to investors would be we don't – we're not looking at doing another kind of JOTEC size transaction. If we were to do anything, it would be a tuck-in and we would not dilute anybody in the process for doing that.

Yes, great. And lastly, I appreciate your commentary with respect to PARTNER III as it relates to On-X. But maybe talk about – and level set us with respect to the mechanic heart valve markets mix U.S., O-U.S., it's my understanding majority of MHV market is outside the U.S. and in emerging markets it just – really in a lot of places can't afford $30,000 apart for transcatheter valves and your point as well taken with respect to the mutual exclusivity of the age groups. So maybe talk about the dynamics that face positively and negatively your On-X business, as you look sort of beyond the real near-term as we digest PARTNER III data into the next couple of years. It sounds like you've got a business even excluding 10X or 10A that could remain a solid grower for you for awhile.

Yes, I think it's a good question, I mean, just to level set on your question. I mean the mix of mechanical valve U.S. is about 30% of mechanical valves and OUS is about 70% mechanical valve. And the primary driver of that is basically economic, as you point out. There are many countries around the world that just can't afford a $30,000 TAVR valve and they – economics are driving the therapy. I think the other thing is, these indications have been I think widely adopted in many countries around the world, but they just can't afford the lower risk patient population, they just can't afford it. And we've still been growing the On-X business double-digits. So we see the On-X, I mean you look – you just saw U.S. On-X grew 18% again in the first quarter, we had good performance outside the U.S. We think the PROACT 10A – and this is an interesting kind of dynamic as the PARTNER III kind of lower risk patient population, the average age of a TAVR patient goes from kind of the low-80s to the mid-70s, and maybe even down – call it down to 70. We think that On-X, the average age of an On-X is as I mentioned in the script is 58, but we think PROACT 10A starts to move that up to 68. So while partners and TAVR may be moving kind of South on age, we're moving North on age. And maybe we meet at 70. So these two populations today are frankly mutually exclusive. In fact, if you were at ACC and listen to the presentation, even the PIs of the trial stated, they believe that surgical valves should be the therapy of choice in anybody under the age of 65, right. So again, I just think this TAVR thing is – I think it's interesting. But don't forget, I mean the tissue used in a TAVR valve is the same tissue used in bioprosthetic valve. And we know from a major Med analysis that was published in JAC just recently, that performance of a tissue valve is much worse in younger patients. The valve deterioration, the explants, et cetera, et cetera, it's just – the tissue does not stand up in a younger patient. So there's actually a clinical reason why you don't want to put a tissue or a TAVR valve in a younger patient, they don't last that long.

It’s helpful Pat. Thank you, I’ll get back in queue.

Our next question comes from the line of Mike Matson from Needham & Company. Please proceed with your question.

Yes, thanks for taking my questions. I guess I wanted to ask about a few questions about JOTEC, so wanted to start, I thought there was a fourth product there that you were expecting to get a CE Mark on potentially this year, that the event is a self expanding, a peripheral stent, so can you maybe talk about that? And what is the market opportunity, there are market size in Europe for that product?

Yes. So just to refresh, there is – there are work for four JOTEC products. We had never predicted that the event is what's coming this year. We were hoping to submit for CE Mark this year. But the three main JOTEC stent graphs and which is the thoracic stent graft inside, which is a branch thoracoabdominal and E-vita Open Neo, which is a Frozen Elephant Trunk. The first two have been submitted and we're highly confident that we're getting our approval this summer. The third, which is the E-vita Open, we will submit this quarter and we're confident we should get an approval by the end of the year. So those are the three stent grafts that we had talked about in our plan. The event is – what you ask about is a self expanding, covered stent PTFE covered stent, which is basically the primary technology we use as the bridging stent on our branch graphs, whether it's the iliac or the thoracoabdominal device. This is a product that fell rate in this kind of chasm from the medical device directive and the medical device regulation, this kind of shifting kind of a tectonic plates in Europe on the regulatory front. And we were hoping to get that product in kind of under the MDD, the old MDD without having to have clinical data. And we don't think that's going to happen just because the door is kind of closing at all the notified bodies. So I mean the good news is we didn't have any revenue in our guidance for that product, the bad news that we're going to have to do pre-market clinical data, so it’s show up later than we wanted, but there was no revenue in the plan. That being said, it's a significant opportunity. The global market for a branch or excuse me for a PTFE covered self expanding stent is $0.5 billion, and we have a great product. So I'm – it's probably one of the most exciting things in our platform. We really haven't talked a lot about it, unfortunately with this kind of MDR situation that we're not going to get it in Europe this year or next year. But we'll be doing the clinical work to bring it to market both in Europe and the U.S. and it's a significant opportunity.

Okay. And then just I guess follow-up on that would be related to the MDR comments that you made so – or MDD, I guess. Just with the three products that you are expecting approval of I guess CE Marks this year for – you don't expect any issues there either in terms of timing or – you're confident you're not going to need data for those.

Yes. So I think going into the year, this was – we typically would put about a quarter amount of timing from an approval standpoint. We actually doubled it just because of the shift from MDD to MDR. I'm very confident that the first two products we submitted, so the thoracic stent graft and the thoracoabdominal, I'm very competent those are going to get approved this summer. We submitted them on time in the first quarter, we've had very few questions back. So again, I think I have very good kind of visibility, I think those are in great shape. We're going to submit our Frozen Elephant Trunk in Q2, so I think probably in June. And I think it should go on in kind of the same path, but I have better visibility to the first two because we've already submitted an already bidding dialogue with the notified body. We have not submitted the third, but again, I think we're very confident we think we can get that approved this year as well. So we should have all three of those JOTEC products approved before the kind of MDR door closes, if you will.

Okay. And then my final question is just another one on JOTEC. So with those three products, are those higher gross margin? Would there be any kind of margin benefit if those when those are launched if the growth of JOTEC kind of accelerates?

No I think, the challenge with the – because it’s going to be in the same geographies, right. So we're going to be launching the same products in the same geographies. And a lot of those are pretty – those markets have pretty good pricing already. And so the only way we're going to pick up margin is on the cost side. And I think in the early days of the rollout you typically have some ramp up time to get your lines all set up. So I don't think there's a lot of margin opportunity in those. I mean we've kind of baked it into the guidance. The bigger change would come when those products come to the U.S. which is obviously ways away when you get to kind of the higher pricing in the U.S. market, which we don't have at this point. So I don't see a real margin opportunity for those products because we've already kind of figured that into the guidance.

Okay. Thanks a lot.

Thanks Mike.

[Operator Instructions] Our next question comes from the line of Suraj Kalia with Northland Securities. Please proceed with your question.

Pat, Ashley, can you hear me alright?

Yes we can hear you fine, yes.

Congrats on a great quarter. So Pat let me start out, you have given a great sort of 30,000 feet level view on how the business is progressing. You guys are hitting on all the numbers and the roadmap, you’ve point out. That you can share Pat, can you walk us through what's going on in the trenches…

Hey, Suraj, we lost you right after you said trenches.

[Indiscernible]

Sorry we – I lost right after you said trenches, the line went dead and then you can just came back up.

Sorry Pat, I was just – so, I was just asking what kind of metrics you can provide us? Let's say this was what JOTEC was doing in Europe, these many hospitals, this is the utilization rate, this is how we've turned it around for that matter On-X and JOTEC in Europe. And On-X, is there any color so that we can get a sense of what here is the under utilization, here is how much capacity we have, understanding that 180 reps are going to be on board.

Yes I think, again there's kind of a couple of different ways you could look at it. I mean, the first point I would make is when we acquired JOTEC, JOTEC had been growing 20 plus percent for the previous five years. So we didn't acquire an asset that needed a lot of turnaround. It was a highly performing organization with a great product line, a great salesforce, a great leadership team. So JOTEC has kind of performed even better than we thought, as you know it grew 25% last year, we had 18% growth, constant currency in the first quarter. And we're on the heels of launching three new products this year. We've also gone direct in multiple countries. So, we took, for example, we took the JOTEC team, the JOTEC product line direct in France because we were direct there and they weren't. We're adding 20 people in Asia, we're adding 10 people in Latin America. Frankly we haven’t even really gotten to the whole opportunity because there's a number of – JOTEC was a small, private company that did a great job, but at the same time they didn’t have kind of a global reach that we had, or the resources that we have. And just taking the current portfolio from JOTEC and getting regulatory approvals in different markets in Latin America, in different markets in Asia-Pacific are going to start adding to our growth. And you haven't even really started to see that yet. So I think there's a number of different ways you could look at this. Ashley Lee mentioned in his comments about BioGlue. BioGlue in Europe grew 10% this past quarter. That was a product line that was growing and kind of low single digits. And the fact that we added the 50, JOTEC reps to the product line, gave that product to the JOTEC reps, we're now growing that business double digits. So there's a number of different things we've seen by the kind of the CryoLife plus JOTEC is like a one plus one equals three. And it's the same in the distributor markets. We've seen significant opportunities in the distributor markets where we had different relationships than JOTEC had and we're leveraging those. So again, I think, there's a multitude of things you could look at it how kind of JOTEC with CryoLife is not only kind of has the opportunity to kind of grow faster, but it is more broad around the globe and even more direct around the globe.

Got it. Pat I don't have my notes in front of me, I'm driving, but has there been a delay in PROACT 10A, IND being approved, has FDA hung up on something or this is just normal process and you guys had factored and forgive me, I don't have my notes in front of me.

No – it's a kind of a dangerous business to predict what regulatory agencies are going to do. And we try to give kind of what we think is the window that we think something is going to get approved. I can say that we've been in constant discussions with the FDA about this trial and they've been very helpful, and I think very kind of open to working with us. The last piece of the puzzle is really the statistics and the powering and it gets very kind of technical. But we've got some of the world's best statisticians working with us and working with the FDA. So I'm pretty confident that we're going to have something here, have an IND approved this summer. Our goal is to start this trial enrolling this summer. And I think once we get the IND approved, then we can start kind of kicking off opening centers. So I think we're on track with pretty much what we told people.

Got it. And final question to Ashley, cadence of gross margins, how would you guide us through the year, just given FX and the impact on the different businesses? Thank you for taking my questions.

Yes, as I mentioned earlier in the call Suraj, they were a little bit lower than we anticipated in the first quarter, and that was from early due to the mix between distributor, business versus our direct markets. We're still anticipating that the gross margins for the full year are going to be 67 plus percent for the full year. So, I think that – again in any given quarter, it can be affected by product mix and geographic mix, but those things set aside. We're expecting the gross margins to be relatively the same for each of the remaining three quarters with the full year, again being 67 plus percent for the year.

Gentleman, thank you. And congrats again.

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

Good afternoon Pat and Ashley. Thanks for taking the questions.

Hi, Joe.

Pat, first off in your prepared remarks, you talked about adding roughly 20 people in Asia Pac and 10 in Latin America. Just going back and looking at my notes here, you were talking about adding distributors in China in the second half and building on the distributor network in Latin America. Just wondering has something changed or is this complimentary to what you're doing in both markets?

No it’s actually complimentary. So there's – if you start with kind of Latin America, so the first piece on Latin America is JOTEC was already had a direct operation in Brazil and was direct with the JOTEC portfolio. They had invested a lot of time over the last few years to build up that operation. So one of the things we're doing, and it's just starting, we talked about it last, I guess we talked about it in Q3 that we started unwinding our distributor in Brazil with BioGlue, and started destocking them to prepare to go direct with BioGlue in Brazil. And that's just starting now. Obviously, we have to hire some direct people in Brazil to support the BioGlue and the On-X product line so that's one of the – some of the people from that are there. The second is having some infrastructure in Latin America from a marketing and education standpoint to either consolidate or open up new distributors in countries that we may not be in or upgrading in countries that we think we can do better. So it's kind of an additive. There's two pieces going on. One is, there are some direct people go in, there's also some infrastructure going into support the distributor market. Kind of the same with Asia Pacific, there are some countries where we're actually going to be going direct. So we're going to be putting kind of feet on the ground in Asia-Pacific. And similar to Brazil, in China, we're going to have some local infrastructure supporting our distributor there and managing the agents and the sub-distributors. So again, it's kind of a hybrid and typically we use a hybrid model in a place like China. So it actually is kind of two things happening at once, right. Some direct people on the ground that will be supporting and working with distributors for the country. Hopefully that makes sense.

Yes. I was wondering just to take it one step further if you could give us some color on what the revenues were per se from Latin America and maybe China so we can have a point of reference?

Yes we're not going to break out down at that geographic level. I think something we probably will do in the future is, as we kind of roll out our five-year plan, as those geographies become more meaningful to the company, we can start talking about what those – we think those numbers will look like. But I think it's premature at this point to give out kind of breaking out line items for Latin America and Asia right now.

Okay. And then Ashley in regards to R&D I mean, you guys have a lot of moving pieces going on with different trials going and initiatives. I was wondering if you could give us some color perhaps on how we should think about R&D going forward, this quarter maybe a little bit lighter than i.e. the rest of us would have thought given all the initiatives going out.

Yes it was a little bit lighter than probably our own expectation, but for the remainder of the year we're anticipating R&D expenses for the full year to be in the high single digits, approaching 10% of total revenues for the year. And as it relates to the last three quarters of the year, we expect each quarter to be roughly the same over the balance of the year again, culminating in the high single digits for R&D as a percentage of revenue, up to 10%.

Okay. Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Well, I want to thank everybody for joining on the call and we've obviously switched to a new format where we're releasing the press release at the end of close of the market and then doing our call. That was basically some feedback we gotten from our investors that they would rather have us do it in this format. So hopefully that works for more people. We really appreciate everybody joining and we're excited about what we've got going on and look forward to updating you on our next quarter's call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.