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Edited Transcript of LMAT earnings conference call or presentation 26-Oct-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 LeMaitre Vascular Inc Earnings Call

BURLINGTON Nov 1, 2017 (Thomson StreetEvents) -- Edited Transcript of LeMaitre Vascular Inc earnings conference call or presentation Thursday, October 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Roberts

LeMaitre Vascular, Inc. - President and Director

* George W. LeMaitre

LeMaitre Vascular, Inc. - Chairman of the Board and CEO

* Joseph P. Pellegrino

LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director

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Conference Call Participants

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* Andrew Christopher Ranieri

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Cecilia E. Furlong

Canaccord Genuity Limited, Research Division - Associate

* Charles Edward Haff

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Joseph P. Munda

First Analysis Securities Corporation, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the LeMaitre Vascular Q3 2017 Financial Results Conference Call. As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Mr. JJ Pellegrino, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir.

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [2]

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Thank you, Amanda. Good afternoon, and thank you for joining us on our Q3 2017 conference call. With me on today's call is our Chairman and CEO, George LeMaitre; and our President, Dave Roberts.

Before we begin, I'll read our safe harbor statement. Today, we will make some forward-looking statements, 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, October 26, 2017, 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 as discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com.

I'll now turn the call over to George LeMaitre.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [3]

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Thanks, JJ. Q3 2017 was another productive quarter. I'll focus on 3 headlines. First, we posted strong bottom line growth, with net income up 56% and EPS up 49%. Second, despite a tough prior year comp, we had our second-highest sales quarter ever. And third, our recently acquired RestoreFlow Allografts continued to outperform expectations.

As to our first headline. We generated record net income of $5 million in Q3, up 56%, which translated into record EPS of $0.25, up 49%. A 70.8% gross margin, operating expense restraint and a low effective tax rate contributed to our bottom line. As a result, we are increasing our annual EPS guidance midpoint to $0.84, a 53% year-over-year increase. These extraordinary bottom line results helped push our cash balance to a record $37.5 million, up $7.4 million in the quarter.

As to our second headline. Q3 sales were $24.8 million, our second-best quarter ever. As previewed on our Q2 earnings call, Q3 2016 was a difficult comparison period because there were 2 major product stories which temporarily increased sales. Our principal patch competitor went on back order, and due to a valvulotome recall, our customers pulled the HYDRO sales forward into Q3 2016. Separately, in Q3 2017, hurricanes in Texas and Florida also affected LeMaitre, reducing revenues by approximately $250,000. As a result, our Q3 2017 growth rate of 7% was down from 17% in H1 2017. And looking ahead, our guidance midpoint implies a Q4 growth rate of 13%.

As to our third headline. Our most recent acquisition, RestoreFlow Allografts, continues to perform ahead of plan, and our North American sales force is excited about this product. Full year 2017 revenues from tissue processing services should be approximately 60% above pre-acquisition levels.

As we have highlighted on previous calls, biologics continue to drive growth, accounting for 35% of Q3 sales, a high watermark.

Our fundamental financial goals remain the same. We continue to pursue 10% annual reported sales growth and 20% annual op income growth.

I'll now turn the call over to JJ.

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [4]

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Thanks, George. Our Q3 2017 gross margin was 70.8%, a sequential improvement of 280 basis points over Q2 2017. The increase was driven largely by manufacturing efficiencies across a number of product lines, favorable changes in foreign currency exchange rates and average selling price increases.

Our effective tax rate in Q3 2017 was 1%, driven largely by increased employee stock option exercises. This reduced tax rate resulted in a record net income of $5 million, a 56% increase. Earnings per share were a record $0.25 in the period, a 49% increase.

We finished Q3 2017 with $37.5 million in cash, an increase of $7.4 million from Q2 2017. Cash increases in the quarter were driven by record cash from operations of $8.2 million as well as receipts from stock option exercises of $3.2 million. Of course, this cash gives us capital allocation options, whether it be operational investments, share buybacks, acquisitions or increased dividends.

Turning to guidance. We expect Q4 2017 sales of $25.8 million to $26.6 million, a reported increase of 13% at the midpoint and an organic increase of 8% at the midpoint. We also expect a gross margin of 70.3% in the quarter and operating income of $5.7 million to $6.3 million, growth of 53% at the midpoint. We are also guiding earnings per share of $0.19 to $0.21, growth of 49% at the midpoint.

For the full year 2017, our sales guidance is $100.6 million to $101.4 million, a reported growth rate of 13% at the midpoint and an organic growth rate of 7% at the midpoint. Our full year gross margin guidance is 70.2%, and our operating income guidance is $20.4 million to $21.0 million, growth of 27% at the midpoint. Our earnings per share guidance is $0.83 to $0.85 per share, growth of 53% at the midpoint.

With that, I'll turn it back over to Amanda for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Rick Wise from Stifel.

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Andrew Christopher Ranieri, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [2]

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It's Drew in for Rick tonight. Just to start on the third quarter, George, I think I heard you say that the hurricane was about a $250,000 impact. But when you just add that back, it's still a shortfall versus your 3Q guidance. So besides the hurricane, can you just talk about maybe some of the other factors that led to the shortfall versus your expectations?

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [3]

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Sure, of course. So probably principally, is sort of the weaker valvulotomes than we expected, and that's sort of been a theme of the year. We put in a lot of the fixes on the valvulotome quality issue from last year. I'm sure you remember that famous story in Q3 of '16. And the product hasn't bounced up as quickly as we thought it would. So I would say if you had to allocate dollars, roughly speaking, I would say we think we lost about 350 versus what we had expected when we gave guidance on July 28 or 27. And I would say, in China, we have a TRIVEX slowdown where we're sort of -- we've kind of gotten into it with our distributor about them fulfilling and not fulfilling the contract. And we're trying to figure out what to do going forward with them and TRIVEX. And let's say those 3 things -- if you wanted to simplify the miss, those would be the 3 things.

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Andrew Christopher Ranieri, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [4]

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Okay. And on the TRIVEX distributor, is that the only product that distributor sells? Or is there other pieces of the portfolio?

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [5]

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Yes. In China, we sell one product, TRIVEX, through one distributor and then the balance of the 4 other devices through a master distributor who really isn't the real main person. It's sub-distributors underneath them. But in short answer to your question, yes, it's the only product that distributor sells for us.

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Andrew Christopher Ranieri, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [6]

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Okay. And just moving to the fourth quarter guidance, so you're calling for a range of $25.8 million to $26.6 million. And I think if my memory serves me correctly, this is the first time you've given a revenue range versus specific revenue target. So can you just talk about your assumptions for that range? What has to go wrong to basically get you to the bottom end? And what has to go right to get you to the top?

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [7]

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Okay. So we didn't look at it that way, Drew. The way we looked at it was the midpoint that we're giving you right now would be equivalent to the old single-dot point guidance that we used to give you. And the -- so we're not thinking about what the band means, what has to go right or what has to go wrong. We would like to see that as the equivalent of what we used to give you. The rationale for moving to a range, if that might be part of your question, is when we got into this, giving quarterly guidance 3 or 4 years ago -- we never used to give quarterly guidance. When we got into it, we thought we were small enough, and we thought we didn't have enough followers to spend people's time digesting what a range might mean. So we tried to simplify it for folks. And we feel now, with the greater share volume and 8 analysts following us, that we should be more like the other companies, all of whom give ranges rather than a single point.

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Andrew Christopher Ranieri, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [8]

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Got you. That makes sense. And just to sneak in a last question about M&A. So the portfolio, I think, is now running about mid-30s for biologics exposure, and we're almost anniversarying the RestoreFlow acquisition. Just as we look forward and thinking about your M&A opportunities, is the portfolio now too heavily indexed to biologics? Or should we be seeing another push sooner or later to drive that exposure higher?

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David B. Roberts, LeMaitre Vascular, Inc. - President and Director [9]

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Drew, it's Dave. Thanks for the question. We do not believe it's too heavily indexed to biologics. The biologics products in our bag as a portfolio are growing faster than the non-biologics products in our bag. So we do continue to look for more biologics. There are other types of graphs, other types of patches, even biologics, glues and sealants, things like that. So I would say we still really like the biologics space.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of Jason Mills from Canaccord Genuity.

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Cecilia E. Furlong, Canaccord Genuity Limited, Research Division - Associate [11]

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This is actually Cecilia Furlong on for Jason. And I just wanted to continue on the biologics. And if you could just provide relative contributions during the quarter and any commentary around XenoSure sales, that would be great.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [12]

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Okay, sure. I'll try to do that for you. So the biologics continue to be the driver at the company. At a very high level, their growth rates are higher than the balance of the company. Of course, in Q3 -- and we all knew this was coming, but in Q3, the XenoSure growth rate was -- I think it was minus 1 or plus 1 or something like that? JJ, am I doing that right?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [13]

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Yes, well, a couple down, yes.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [14]

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Okay. And so we all knew that was coming. This is sort of expected by all of us. We don't expect that to be the norm. I believe the growth rate for the year for XenoSure looks to be about 21%. And so we're thrilled about that big number. But in terms of in Q3, the growth rates for the other products, I think Omniflow was 14%, ProCol was 11%, and RestoreFlow, there's no organic growth rate to give you, but it was an excellent sales number. And as we mentioned at the top of the call, as I mentioned in my script piece, we think we're going to get a 60% growth rate in '17 versus the business that we bought November 15, 2016.

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Cecilia E. Furlong, Canaccord Genuity Limited, Research Division - Associate [15]

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Okay, great. And then also, if it's possible, would you be able to provide an estimate of what organic growth in the quarter would have been, excluding the hurricane and one-timers from the year ago quarter, and then just your thoughts around organic growth going forward as well.

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [16]

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So -- yes. So the organic -- the hurricanes, we think, were about $250,000, so maybe a little more than 1% or so. So the organic growth rate would have maybe been more about breakeven.

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Cecilia E. Furlong, Canaccord Genuity Limited, Research Division - Associate [17]

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And then ex-one-timers from the prior year period as well?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [18]

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No one-timers in the prior year period.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [19]

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Okay. Cecilia, you're getting at the Baxter back order, and we haven't done that work to give you that number.

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Operator [20]

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Your next question comes from the line of Joe Munda from First Analysis.

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Joseph P. Munda, First Analysis Securities Corporation, Research Division - Analyst [21]

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Real quick. I was wondering if you could provide us maybe some commentary or color on the search for a new sales leadership in both the Americas and Europe. Any color there would be great.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [22]

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Okay, terrific. Thanks, Joe, for asking that question. It's very relevant. So the retirement of Peter, the GM for Europe, was September 30, but of course, we had had a long lead-in on that. We knew he was retiring about 3 months prior that. So the search is going quite well. It got up and going very quickly. We've had some fantastic candidates. My sense is that the search will close and the hiring will happen Q1, Q2. We're a little bit slower out of the gate on the American search for the VP of the Americas. In both these instances, I -- and I would say that thing probably happens faster once it starts to happen. So maybe that thing closes at the same time Q1, Q2. I would say as a silver lining to all this, it's fantastic for me to get a chance to straighten out a bunch of issues and get into these things with all the regional managers. So I have a bunch of regional managers on both sides of the Atlantic reporting to me, as I did back in 2015 when we had the American changeover as well. And I think it's fantastic to expose them directly to the CEO. I have different -- slightly different angles on topics and projects. So quick answer to your question, Q1, Q2 for both of those searches. But in the meantime, I think there's a lot of good things happening in the direct communication between myself and the regional managers.

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Joseph P. Munda, First Analysis Securities Corporation, Research Division - Analyst [23]

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Okay. And then as far as -- could you give us some color or split out what the rep count looks like versus North America, Europe, rest of the world? That would be great.

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [24]

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Sure. So the Americas are at 46, which is roughly stable for all year, and Europe is down by 3, it's 33, for a total of 89, including 10 from Asia, which hasn't moved much. And I would say one thing just to go back to your previous question. As -- again, Peter just retired 3 weeks ago. But inside of the summer, we have found in a good way some personnel topics that we've been able to start addressing over there that maybe they didn't want to address that over the last 3 or 5 months because of the retirement that was upcoming. And so we're getting some nice personnel movement. We want many of these things to happen.

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Joseph P. Munda, First Analysis Securities Corporation, Research Division - Analyst [25]

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Okay, that's helpful. And then I guess my last question. JJ, I'm looking at the guidance here. Gross margin is going to be slightly better current guidance versus prior. Then the midpoint of the op income guidance appears to be lower than the previous guidance. So I guess could you give us some picture or some color what's going on as far as margins are concerned?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [26]

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Yes. I mean, for the year, Joe, I think we ticked up by just 0.2% or so. And the beat in Q3 had a lot to do with that 0.8% beat from where we were before. So for the year-end, we're sort of getting a lot of puts and calls on this. More RestoreFlow sales will bring you down a little bit. Year-end cleanup brings you down a little bit. Turn-on of the clean room maybe brings you down a little bit. But more valvulotome sales, I think we're expecting to be fairly bullish sequentially with valvulotome and XenoSure as well, and those will help the margins. So some gives and takes there, but up 0.2% for the year.

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Operator [27]

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Your next question comes from Charles Haff from Craig-Hallum.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [28]

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Getting back to margins there, I think you said gross margins, you had some pressure last quarter from Omniflow and Procol. I'm wondering if the gross margins are starting to improve there as you saw the higher growth rate.

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [29]

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Yes. To the extent that HYDRO and valvulotomes and XenoSure do well, that certainly helps the margin. On RestoreFlow and Procol, they're kind of in a little band for now. RestoreFlow is sort of in the mid-30s gross margin, but that's going to improve fairly quickly over the next few quarters as we get away from purchase accounting topics, which are fairly hefty in this case. So I think you're going to get a good answer there as you move forward, but right now, it's a drag on the gross margin.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [30]

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Okay. And then for sales and marketing, you showed very strong leverage this quarter. Is there anything to note there?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [31]

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So with sales and marketing, you know we were down a couple of reps sequentially, and our VP of Sales in the U.S. was not in the quarter as well. And so that helped in terms of getting leverage on the selling and marketing line, I would say. But we've been getting that leverage in prior quarters as well. I think we're at 26% or so as a percent of sales in Q2. So it bounces around a little bit. But I think that's sort of the specific answer in Q3. And then maybe as we hire up the VP position, again, it ticks up a little bit but not too much.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

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Okay. So would you expect kind of this level for the fourth quarter until you fill the VP position in the North American region?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [33]

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I guess I'd answer by saying our OpEx sequentially, Q3 to Q4, looks like it's kind of flat. And so baked within that, there's some ups and downs within the different areas. But I would say generally yes, that's probably a decent assumption.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [34]

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Okay, great. And then let's see. For XenoSure, can you give us any updates on Australia or Japan regulatory process?

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George W. LeMaitre, LeMaitre Vascular, Inc. - Chairman of the Board and CEO [35]

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Okay. So no update except that Australia went in on June 30. I'm pretty sure that we talked about that on the July 27 phone call. And now it's a waiting game. We generally think that's an 18-month waiting game from the June 30 submission. China, you didn't ask that, but I'll answer it anyway. The China trial is up and running here, and we've got 25 patients enrolled. It's a scooch slower than we want it to be, but it's up and running, and we're real excited about that. And again, we are sort of thinking 2021 for an approval. So this is going to be a long one. In Japan, we're also currently thinking 2021. And during the quarter, we got some reasonably good news from the Japanese MHLW. And they're believing that it's not going to be a human clinical trial but rather an animal trial. And so that shortened that thing a little bit. And maybe before, we were thinking 2023 in Japan, and now we're thinking 2021 or something like that. I don't think we're -- I think we understand China and Australia right now better than Japan, but we were quite pleased with the initial ruling that we got from the Japanese MHLW.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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Okay, great. And then on the GAAP tax rate, what do you think we should be using for the fourth quarter and for the full year '17?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [37]

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Yes. So we're kind of a bucking bronco there with the tax rate over the quarters. And that has a lot to do with stock option exercises. And so a 24% rate in Q1 in '15 and now 1%, I'm going to guess, if you go back into the mid-30s, maybe 33%, 34%, 35%, somewhere in there for Q4, that's probably a good placeholder. I can't -- it's tough to predict what stock option -- employee stock option exercises are going to be in Q4. But if you factor in some kind of maybe reasonable assumption that isn't extreme like it was in Q3 ,you get to that 33% to 35% place.

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Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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For the full year?

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Joseph P. Pellegrino, LeMaitre Vascular, Inc. - CFO, Principal Accounting Officer, Treasurer, Secretary and Director [39]

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For the Q4. And so then your full year will be -- yes, your full year will then be about 19%, 20% in that range.

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Operator [40]

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Ladies and gentlemen, this concludes today's conference. I would like to thank you for your participation. You may now disconnect. Have a great day.