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CryoLife, Inc. (CRY)

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CryoLife, Inc. (CRY)

Q1 2017 Earnings Conference Call

April 27, 2017 8:00 AM ET

Executives

Ashley Lee - Executive Vice President, Chief Operating Officer, and Chief Financial Officer

Pat Mackin - Chairman, President, and Chief Executive Officer

Analysts

Jason Mills - Canaccord Genuity

Jeffrey Cohen - Ladenburg Thalmann

Suraj Kalia - Northland Securities

Joe Munda - First Analysis

Brooks O'Neil - Lake Street Capital Markets

Presentation

Operator

Greetings, and welcome to the CryoLife First Quarter 2017 Financial Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is now being recorded.

It is now my pleasure to introduce your host, Pat Mackin, Chairman, President and CEO for CryoLife. Thank you. Mr. Mackin, you may now begin.

Ashley Lee

Good morning, and thanks for joining the call, everybody. This is Ashley Lee, the CFO for CryoLife. 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 in this call that look forward in time involve risk 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 for predictions of the future. These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations. Additional information concerning risk and uncertainties that may impact these forward-looking statements is contained from time to time in the company's SEC filings and in the press release that was issued last night.

Now I'll turn it over to our CEO, Pat Mackin.

Pat Mackin

Thanks, Ashley, and good morning, everyone. I'm pleased to be here with you this morning to report on a very productive first quarter. CryoLife has gotten off to a solid start in 2017, and we are very excited about the prospects for the remainder of the year. As you may recall, last quarter, we were impacted by several items which we believed we would be able to resolve in a relatively short time frame.

I'm pleased to report that we made good progress on these items. However, we've not reached a final resolution in the On-X AAP issue in Europe. I will provide you with a detailed update on each of these areas in a few minutes.

Financially, we posted a solid quarter led by On-X, tissue processing and further margin expansion. Our gross margin improvement was driven primarily by tissue processing productivity improvements.

As we've stated before, our objective was to increase our margins through a combination of improved business mix and operational efficiencies. As you will hear today, we are doing just that. I'll now take you through our quarterly update regarding our 2017 key initiatives, followed by Ashley, who'll provide a detailed review of our first quarter financial results and then we'll open the call to your questions.

Our first key initiative for 2017 is achieving our full year 2017 financial guidance. Revenue for the first quarter of 2017 was $45.1 million, representing growth of 5% on both a GAAP and non-GAAP basis. As a reminder, our non-GAAP revenue includes On-X revenues for the period in 2016 prior to the closing of the acquisition, and it also excludes revenues from the divested HeRO Graft and ProCol product lines for 2016.

Our Q1 revenue was slightly ahead of our expectations. Our growth was balanced between our key medical devices and tissue products and there continues to be strong demand for our products in the market.

During the quarter, we made good progress resolving the short-term factors that impacted our fourth quarter revenue. The first factor was a shortfall in cardiac tissue. As we commented during the Q4 call, tissue revenues can be unpredictable, making it difficult to forecast in the short-term, which is why we think full year guidance is the best indicator for growth of the business and more representative of the performance of that segment.

For example, I am pleased to report that our tissue processing revenues grew 10% in the quarter, including a 17% increase in cardiac tissue and a 6% increase in vascular tissue. As a result, although we had a great first quarter, we are still holding to our guidance to mid-single-digit growth in the tissue processing business for 2017.

We have shared with you our plans to employ new strategies to build traction in our tissue business and I'm pleased to report that we are already seeing the benefits of our new approach. For competitive reasons, we will not get into the specifics, but we have reason to believe that our campaign as to why CryoLife is a preferred partner for procurement organizations is having an impact.

The second factor that impacted our Q4 was BioGlue inventory management by our Japanese distributor. More specifically, we commented on the Q4 call that distributor ordering patterns can be somewhat lumpy as is evidenced by the fact that our Asia Pacific business grew 27% in the first quarter compared to the prior year. As previously communicated, our Japanese distributor indicated to us that they plan to grow their business in 2017 by 20% over 2016, and their order activity so far this year has been consistent with that goal.

The other factors that impacted our Q4 revenue were the suspension of the CE Mark for the On-X AAP products and an unexpected softness in the On-X OEM business. In terms of the CE Mark, by the end of the month, we plan to have submitted the data required to lift the suspension to our notified body in Europe and we'll await their response.

We're hopeful that the suspension of the CE Mark will be lifted no later than the end of second quarter. As a result of this, we now expect our Q2 revenue impact of approximately $400,000 to $500,000. As for the nonstrategic OEM business, this continues to be a headwind, as anticipated, and we have factored that into our guidance.

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