Welcome to the LeMaitre Vascular First Quarter 2018 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. J.J. Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

Thank you, [Skylar] [ph]. Good afternoon and thank you for joining us on our Q1 2018 conference call. With me on today's call is our Chairman and CEO, George LeMaitre. Our President, Dave Roberts, is travelling overseas on business and will not be on the phone call. Before we begin, I'll read our Safe Harbor statement. Today, we will make some forward-looking statements, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as, believe, expect, anticipate, pursue, forecast, and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, April 25, 2018, 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. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our Web-site at www.lemaitre.com. I'll now turn the call over to George LeMaitre.

Thanks J.J. The highlight of Q1 was the increasing acceptance by the North American sales force of the Restore Flow acquisition. [Indiscernible] sales hit a record in Q1, up 48% over the prior year, and we see more growth ahead. These [indiscernible] saphenous veins are a close substitute to the in-situ saphenous veins prepared by the LeMaitre Valvulotomes. These two products really are two peas in a pod. Now I'd like to remind you of several initiatives we have recently undertaken to more tightly focus our Company on vascular surgery, and in particular our higher-margin and biologic product lines. The recent Reddick divestiture was a pruning of the portfolio, eliminating our two non-vascular product lines. This $7.4 million divestiture also expands our warchest beyond the $45 million of cash on the March 31 balance sheet. In the past, we've used our cash to acquire companies and pay dividends. This remains our intention. Also, coming into the year we modified our sales commission plan and our intra-company price lists to further incentify our sales reps towards higher-margin devices. Specifically, we found in Europe our grafts and catheters were sometimes being sold below cost. This has been fixed. In China we have also made changes recently. In Q1 we cut out a layer of master importers in order to sell to hospitals through just a single layer of distributors. At the same time, we continue to see ample virgin territory for our sales force and have begun to ramp up hiring. We added four sales reps in Q1, exiting the quarter with 94 on the payroll and we now plan to accelerate to approximately 98 to 105 by year-end. This state of hiring is generally in North America and Europe. And to help manage European growth, we were excited to welcome our new President of Europe, Frank Guenther, on March 1. Before turning the call over to JJ, I'd like to remind everyone of our financial goals. We aspire a 10% annual reported sales growth and 20% annual operating income growth.

Thanks George. Our Q1 2018 gross margin was 71.1%, versus 71.9% in Q1 2017. The decrease was driven largely by manufacturing inefficiencies and increased Restore Flow sales, which were partially offset by the effects of the weakening dollar. Operating expenses in Q1 2018 were $13.6 million, up only 3% versus the prior year period. This cost control allowed us to post Q1 2018 operating income of $4.9 million, up 16% versus the prior and representing a 19% operating margin. Our effective tax rate in Q1 2018 was 22% as lower U.S. tax rates, stock option exercises, and Australian NOLs drove the rate down. We expect our full-year 2018 effective tax rate to be approximately 25%. We finished Q1 2018 with a record $45.4 million in cash, an increase of $3.7 million from Q4 2017. Cash increases in the quarter were driven by cash from operations of $3.8 million and stock option exercises of approximately $300,000. The Reddick divestiture added another $7.4 million to cash in April. Turning to guidance, we expect Q2 2018 sales to be $26.6 million to $27.4 million, a reported and organic increase of 5% at the midpoint. We also expect a gross margin of 69% in the quarter and operating income of $11.1 million to $11.7 million, growth of 106% at the midpoint. We are also guiding EPS of $0.41 to $0.43, a growth of 83% at the midpoint. Included in our operating income guidance is an estimated $5.8 million gain from the Reddick divestiture. This amount may change as the accounting settles. For the full-year 2018, we have updated our sales guidance to $106 million to $109 million, a reported growth rate of 7% at the midpoint and an organic growth rate of 6%. Our full-year gross margin guidance is 71% and our operating income guidance is $27.9 million to $30 million, a growth of 37% at the midpoint. Our annual EPS guidance is $1.05 to $1.13 per share, a growth of 27% at the midpoint. With that, I will turn the call over back to Skylar for questions.

[Operator Instructions] Our first question comes from Rick Wise with Stifel. Your line is now open.

It's Drew on for Rick. I guess just to start off on the first quarter results, can you just talk about maybe some of the factors that led to quarterly revenue and gross margin being towards the lower end of your guidance? Was there any disruption from the divestiture? I think you mentioned that there was a change in sales force compensation structure that you see procedural softness or any lingering China issues. Just help us better understand some of the pieces here.

Sure, I appreciate that. So with 300,000 off our midpoint of guidance, making just barely our bottom end of the range, I would say the big issues here which we probably didn't understand as well going to the quarter, as we should have, was we ran a fairly good-sized contest in Q4 and maybe that pulled some of the revenues out of Q1 and into Q4. As it relates to, you mentioned China, China continues to be sort of a bad guy here in terms of what's happened in the past, although we feel real good about what's about to happen. And the China issue of not having revenues, effectively we had 27,000 of revenues, the China issue pulled down clips as well as TRIVEX. So, it affected those two product lines. We also had sort of unexpected softness in Germany proper and Switzerland, both that were down sort of 7% and 11% organically. I don't think these are lingering long-term issues but it didn't help out the quarter.

Okay. And just with that in mind, so as we look to 2018 guidance, I think the Street has become accustomed to seeing 10% annual reported growth. So, just a 7% reported growth that you are revising now, I mean is that all driven by the divestiture or are there any other lingering softness in products or geographies that you see?

So, the growth for the full year, we start off with the Q1 number where we are at. So that puts us a little bit behind the April, all right. And so then for Q2 we are coming out with 5% growth. So, H1 is definitely sort of a little bit of a challenge for us, Drew, but then I think we see some pretty good recovery in H2. We've got some easier comps going on in H2. I bet China starts to recover more robustly in H2. That Germany topic that George was just talking about, that's probably going to recover in Q2 through, more robustly in Q3 and Q4. The divestiture of the Reddick should help probably as well on the CCC on an organic basis because we won't have that drag on growth that the Reddick was giving us. And then we are also going to hire more reps throughout the year and we'll probably get some surge there from the reps as we move from 94 currently to maybe the higher 90s, sort of 100, by the end of the year. So, all in all, I think what you're looking at generally is sort of H1 a little bit light, and then H2, some nice recovery, easier comps, good answers in China, Germany, and with your sales reps.

True. Maybe I can also take the high-level shot at that, which is, the guidance has been brought down for the year by 3.35 and the Reddick Catheter sold 3.3 last year. And so, you are pointing out correctly, this is the first time we haven't had this 7 – this reported number going to meet our 10% barrier, but I think it's pretty rare that we sell a product that big. And I'd also say, the year is long and there is plenty of stuff to do and the warchest is as big as it's ever been, so maybe at some point we add along to that, but you don't know and we're not predicting anything like that.

All right, and just on the topic of the warchest and M&A, just with the general surgery product divestiture, so you are a pure-play vascular surgery company now. We always ask you about adding to the portfolio, but do you have a need to prune any other slower growth or lower margin products? And just with M&A in mind, with the divestiture, is this signaling any type of like laying a foundation for something more transformative on the M&A front?

Right. I wouldn't, to answer the back of the question first, I wouldn't say this is specifically laying a foundation for anything specific. I would say, we have really wanted to be vascular-only for a long time. This has been a very strange piece of our world that we'd hire 94 vascular sales reps and we tell them, go sell Reddick on the side. So, this is really truly a pruning. If you are asking also, are there other products we want to get rid of? Not necessarily, although honestly, life evolves and life changes and in 6 or 9 or 12 months we could see that our bag is better as XenoSure [indiscernible], valvulotome shunt bag, rather than all that and some other products, but we don't have anything specifically up our sleeve. We are constantly evaluating the portfolio.

Got you. And just one last question, can you just – you called out Restore Flow growing in the quarter, can you just talk about the revenue breakdown for your other biologics and Restore Flow and just provide us an update there?

Sure. So, I can tell you, headlining XenoSure up, Valvulotomes up, all three of XenoSure, Restore Flow and Valvulotomes had record quarters and their growth rates were 12%, 48% and 10% respectively, and shunts were also strong up 12%. I actually am not prepared on the biologic side. I don't know if we gave you the full biologic thing.

I did not. We'll get back to you on that.

We'll get back to you on that, Drew. Sorry about that. I should have been more prepared.

Our next question comes from Jason Mills with Canaccord Genuity. Your line is now open.

This is actually Cecilia Furlong on for Jason. I was just wondering, could you just provide an update on your recent transitions in your sales force leadership and just the dynamics on hiring and retention rates in the quarter and what really drove you to increase your target [indiscernible]?

Okay, that's a good question, Cecilia. Thank you very much for asking. Okay, so we mentioned in the script, Frank started March 1. He is a replacement for Peter, who retired September 30. So I have now given those seven reports back over to Europe and Frank is taking care of all that and Frank reports to me. We are thrilled about that. Inside of the European portfolio, in a good way we have also had a couple retirements and turns and things like that that have been in the coming as Pet4er was retiring. So we are real excited about some of the new – a couple of the new managers over there. In the U.S., I am still searching for VP of Sales, but in the meantime it's just fantastic to have the direct touch for me with our SMs in the U.S. I think some of the, and that's the transition question about growing the sales force, [indiscernible] answer the turnover one, that's an easy one, for the first four months of the year we have only had two worldwide rep voluntary resignations. And I think you would remember last year we had a pretty strong year as well. I feel as though there is something that we are doing with these comp plans that's keeping the reps around because we do know external to LeMaitre it's been a fairly high turnover environment, particularly in the U.S., and again, two out of 94, maybe that's 2.5% turnover, and that's dramatically lower than what we would have expected it to be. But although that's only 24 months, so maybe you triple that, but still a lot lower than the old days. As far as what keeps driving us to grow the sales force, one of the things is, when you have a little bit more money to play with, which we do with the Reddick divestiture, the first thing you say is, what are the great opportunities that you can access, and I would say, not having a rep in Portland and Jackson, Mississippi and a second one in Chicago, places like that, you look at these and it's an opportunity because you are not going to sell too much to Portland vascular surgeons if you don't have a sales rep there. So, there seems to be some pretty juicy cities to fill in and we are taking advantage of that.

Okay, thank you. And then just switching gears, could you provide some color on the recent valvulotome trends and what you are seeing so far in 2018, as well as your future outlook for the product?

Right, okay, and so to reiterate, we had a record quarter in Q1, we were up 10%. It was on top of a record quarter in Q4, which was up 24%. Those two numbers you might kind of see as recoveries to a certain extent for some rough quarters back in late 2016 I think and early 2017. The valvulotome issue for us was an internal quality issue and we fixed it and now we are running at complaint rates of about 15 or 20 devices a year and last year in 2017 we lodged 60 complaints from surgeons about our products. The complaint trending and tracking process is really very serious, and so, those are hard numbers which is we cut the complaint rate by 75%, and I think that's what's driving our valvulotome business as well as the expanding sales force.

Okay, great. Thanks very much for the color.

Our next question comes from Raymond Myers with Benchmark. Your line is now open.

Let me ask first about the XenoSure revenue. What was XenoSure revenue in the quarter?

We are saying it's up 12%.

Okay, great. And tell us a bit about where you are planning to hire the new sales reps. Is it sprinkling them across the country as kind of you described or is it targeting any particular geography, U.S., international, or any particular product areas?

Right, okay. So, it's a good question, geog is a good topic. So, I would say it's sort of 65% North America and 35% Europe, with the only add in Asia being Sydney, but basically 65-35. There was a product wrinkle here, which is as we have gotten into Restore Flow we are finding it's more a concentrated business where we might sell $22,000 a year of valvulotomes to a big doctor. You might sell $200,000 of Restore Flow to a big doctor. And we could loosely call those surgeons 'whales', if you will, and you really have to cover the whales well. And we found that maybe geographically we need to drop in some reps on top of where we think some of these 'whales' might be. So there is a little bit of a product wrinkle in there, but I don't think this growth is about this. I think the growth is about us continuing to see great opportunity with this terrific suite of vascular devices, and then asking ourselves, shouldn't we have a rep in San Antonio and so on and so forth. I hope I covered a bunch of your questions. If you want to parse through and figure out which ones I didn't answer, I'm happy to keep going.

That's real helpful. Talking about North America Head of Sales, I understand you have been doing that, you have done it in the past and you are quite experienced at it. Do you intend to maintain that role long-term and where do you expect your North America sales leadership to be in say a year from now?

My long term career plan is to be the Chairman, not even a CEO. So, no, I hope I don't have to keep doing this forever. Though I will say I got seven fantastic regional managers and I have turned over two of them since I have been in this seat and I feel great about the two new ones that we put on out of the seven. So, a lot of good 'I found' happens when you have the CEO kind of stick his hand into a business because I can make things happen fairly quickly. A little bit of Cecilia's question about why the reps now, is a little bit tied to that as well, which is, I'm closer to the action and I'm able to pick out quick smart hires whereas previously it kind of had to go through layers to get to me. And so, no, I don't plan on staying there forever. I've been searching for nine months and just I don't want to delegate it to someone that we are not totally enthused about. One of the things slowing the process down has been we insisted on when we hired Frank over in Europe that he would be a Frankfurt, a citizen of the Frankfurt area, and we are insisting here that the person be a Bostonian, if you will, or that they move to Boston. And a lot of sales RSMs in this world want to work from their house in for instance San Antonio or Georgia or whatever. They don't want to move to Boston. And so, we have started a little bit with that. It's a little bit unique to us that we are insisting the person be in the building and working on the operational issues, and I'd say that's been a slower down, but honestly, while it's been going on, I think we've been making amazing strides with the comp program. I had my hands all over that comp program turning over into the year, and also as I mentioned, kind of re-profiling the RSM squad.

Sounds good. Thank you. That's helpful. Can you touch on the China TRIVEX distribution change? You mentioned some changes to China distribution. Maybe elaborate on that a little more.

So, China, the story that you have heard from us probably three or four quarters consecutively, and it's been a bad story, Q3, Q4 and Q1, effectively no revenues. I think maybe 25 in one or two of those quarters as we shut down our old distributor who was missing targets. And we sort of, at the end they had such a tough contract, they had to hit such targets, we finally said, and it was in the contract, we can leave you when we want. We sent them a letter to cure in January. They couldn't cure. We terminated them officially in March. And now, that's a TRIVEX master distributor. They were also selling through a layer of sub-distributors throughout China. We are now getting our own set of sub-distributors and we are starting to sell through. So whereas China has been a bad topic for three straight quarters, it's about to start becoming a good topic. After Q4 is over, we have a tough Chinese comp next quarter, but in Q3 and beyond we have effectively zero comps. And it feels to me like it's going to start being a $200,000 quarter business because of our ability to sell TRIVEX at the higher closer-to-retail price to our group of sub-distributors rather than us selling it to the master importer who then sells it down to their distributors and then to the hospital.

Great. Good news. Thank you. Let me leave it there.

Our next question comes from Joe Munda with First Analysis. Your line is now open.

Real quick a couple here, I was just wondering if you could break down growth for us in the quarter, unit volume versus price, give us some sense of that. As well as, George, could you give us the current breakdown of the reps by geography?

Of course. So, to your first question, we grew organically 3% and reported 8%, so 5% of the growth is FX, 3% is price and zero is unit. And usually, as you know, we have a normal quarter sort of 50-50 unit and price, and FX doesn't really matter usually, but this is very different quarter. As for where the reps are, right now at the end of Q1, 47 in the Americas, 37 in Europe, and 10 in Asia Pac rim should give you 94.

Okay. In regards to your comments you made in your prepared remarks, you talked about pricing list and that some products were being sold below list. Can you give us a little bit more color there and what was going on and how you figured out that this was occurring and what have you done to remedy? I know you talked about a new price list, but could you give us a little bit more color there.

Of course, that will be great. And so, one thing to know about all this all the time is that our reps around the world are all compensated on gross profit dollars and the growth thereof. So, knowing that, one of the things we have done to try to get sales for our AlboGraft and also our single-lumen catheters, we had been trying to get volume there to feed our factory. And so, five years ago or so, the Head of Europe had said, let's help lower transfer prices between Billington and Frankfurt in a bid to show the reps in Europe gross profit even though there was no real gross profit. We call this process now of stopping that on January 1 and it's all stopped now, it's called de-subsidization. So we have stopped subsidizing the AlboGraft specifically and the single-lumen embolectomy catheters. And so, we are going through a little transition there. It's kind of probably a unit issue in Q1 as it relates to single-lumen embolectomy catheters as well as AlboGraft, although for me as a profit-seeking manager it's a slam dunk, that's the right move is, don't let your sales reps get paid for selling things below cost, and that's been in our business for five years and it's now not in our business.

Okay, that's helpful. Thank you. And then I guess my last question, you guys are – you built a new clean room, you are building out more at the current HQ, you talked about manufacturing inefficiencies in the quarter, I guess, J.J., when can we start to see some of this operational efficiency, manufacturing efficiency really take hold on the gross margin line going forward?

So Joe, we spent about $5 million last year, as you know, building out two clean rooms, one essentially a biologics dedicated clean room and then we expanded part of our main clean room. There is probably an immediate headwind on the gross margin by 0.5% or so. But I think there is improved processes as a result of the more efficient layout. So you are just laying out people better, you are moving fluids and products better from one location to another, just general improvements in process in a lot of areas. That takes a little time I think to come through, Joe, but probably not that much time. So maybe in the latter half of this year, maybe that biologics clean room starts to sort of combat that increase in the depreciation cost from the buildout. So you'll probably see that pretty quickly, and then in the main clean room maybe a little bit longer than that. So you should see some improvements underneath that sort of fixed cost [indiscernible] coming at you from the buildout over the next few quarters.

Okay, thank you.

At this time I'm showing no further questions. So, ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.