Merit Medical Systems Inc (MMSI) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Merit Medical Second Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at anytime during the conference, please press the star followed by the zero.

As a reminder this conference is being recorded today Tuesday, July 26, 2005.

I would now like to turn the conference over to Mr. Fred Lampropoulos Chairman and CEO of Merit Medical. Please go ahead.

Good afternoon ladies and gentlemen. Now this is Fred Lampropoulos. We're broadcasting from our corporate headquarters in South Jordan, Utah. With me are Kent Stanger, Marty Stephens and Lee Weintraub and other members of our staff.

We're delighted that you would take the time to visit with us. As a reminder this broadcast will be available on webcast and also in transcript form. If you go to our website the information is there to gather the information.

Approximately an hour ago we reported our second quarter earnings. Our sales and earnings revenues were a record $42.4 million up 9% from the quarter. Previous quarter earnings of $0.17 per share and for the comparable period in 2004 we were $0.18 on $38.9 million.

For six months as you're all aware were a record $82.7 million. A reminder that our guidance was 168 and 171 and of course that was up about 8% and also remind you the last year our first two quarters were very, very strong quarters.

We also then breakdown and we'll discuss the various areas in terms of sales with a note that our catheter sales continue to rise. All layers of our business were up and across the board.

As we have discussed with many of you in the past gross margins were down and they were 43.1% in the quarter and as we pointed out in our press release a good portion of that was because of the start up of our Richmond facility which by the way will be online fully approximately the first of September. We're there administratively. (inaudible) are in the final processes and in about 30 days from now we'll be up and running. We've now closed 135 accounts in that particular area of our business and we're ramping it right now on a ramp rate from that business to $4.6 million which is up a little bit higher than what we had anticipated because of the demand for the product.

Overall we also as you are very well aware have introduced two products we are ramping for production. We are selling the introducer feed and the Viceroy. I can tell you that from files and sales that we continue to be very optimistic about the products.

We are just now starting to be able to have more availability of inventory and we still only have approximately half of our sales force selling the product and of that we've just added about six or eight I think additional sales people there. So we're just starting on that effort but our production is ramping and the capability. We're very excited. I had an opportunity to talk to one of our sales guys today in Boston going against a competing product in a large center and there were positive results and we'll see this product ramping up.

I'm also pleased to announce that it's a great honor today to have with me are 10 new Merit sales people in our room sitting with us here today who are here for training. Just a good looking group of people with fire in their eyes and I can see all that fire. They're all nodding their heads and saying yes sir we have fire and we're excited about the expansion of the sales force and the products.

I also have just concluded our project for the grants meeting in all of our products and scheduled projects of our magnificent seven are on ramp floor introduction this year. So the news for the day is a good quarter. Good earnings I believe particularly when we are still ramping. We have facilities that we're opening. Personnel that we are hiring and I believe that the future of the company is bright and as bright as it's ever been. That has been our message. It continues to be our message with some new opportunities that will be presenting themselves in the new future relative to other opportunities that we'll discuss as the questions come forward.

With that said let me turn some time over to Kent to discuss some of the financial highlights. Kent if you just take a moment or so we'll go from there and then open it up for questions.

First of all I'd like to say that I'm really pleased with the revenue growth we have this year. Our catheter sales are up 22% for the quarter and 16% for the six months and continue - or sorry 14% and continues to be strong.

The other thing that I think of note is that our SG&A costs we actually got some leverage there and it helped us on our earnings because it declined to 22% of sales. In other words the growth rate and our expenditures there were less than the top line growth.

The other thing that I would loan is that the R&D expenses are accelerating. We're vesting there but we're getting results for it and so I that's gratifying.

Is that it?

Uh-huh.

Okay just as a point we will be attending the Adams Harkness Growth Conference in Boston. I'll be presenting here next week. We'll present these numbers. We'll also be attending one for UBS in September and then one for C.L. King. These are issues - we'll make some of these notifications in the future. We don't deem them to be material but just as points of information so we will be at Adams Harkness next week and we hope that if there are analysts that would like to visit with us or investors we'd be delighted to schedule that time with you and look forward to meeting with you in Boston next week.

I think that covers the highlights other than just saying as I have that we continue to be very enthusiastic. We have a staff that is passionate and engaged. We have a plan. We are expecting that plan and it is my belief that we will execute this plan as we have presented it this year. What that will do for the future - it's great the kind of environment, accelerated growth and accelerated opportunities for the company.

With that being said I think that pretty well capsulizes the press release. We'd be delighted to take any questions and we'll direct those to the appropriate staff member.

So at this time we'll go ahead and turn the time over to operator and we'll ask her now to accept calls.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session. If you have a question, please press the star followed by the one on our push button phone. If you would like to decline from the polling process please press the star followed by the two. You will hear a three tone prompt technology in your selection. Your questions will be polled in the order they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for the first question.

And our first question comes from Mr. Matt Duncan with Stephens Incorporated. Please so ahead with your question.

Good afternoon Fred and Kent. Congratulations on nice progress in the quarter.

Thanks Matt. It's good to here your voice.

First question. On the new products that you're rolling out Fred can you just give us some feel how much revenue you might expect from those products both this year and then as we roll into next year how important are those products in Merit's future?

Well Matt we're not going to see a lot on the remaining five because most of them are late third quarter and fourth quarter under the holiday period. So you're not going to see a lot of contribution from the remaining five. However, from the introducer sheets in the Viceroy we're going to start to see significant - when I say significant we're going to see improvements in growth in those month over month and year over year as we move forward, but again the real issue will be as we take these projects and move them forward. So as we look into 2006 you'll see the Sheath, the Viceroy and a couple of other - the products like the Honor Hemostasis Valve and some of those start to accelerate and then the drainage catheter. The IMPRESS catheter is one that I think is sleeper. I can tell you that I've met with a number of physicians in the last couple of days. Their response to the performance of the catheters is extraordinary. We've had some distributors in from overseas for some other meetings and they've looked at the products and the catheters. So I think that's one of the sleepers and that represents a pretty substantial market particularly as Merit for my competitors who are on the phone starts to take a look a little bit more closer into interventional radiology.

So not a whole lot of stuff but the rest of the business is driving and we'll move forward and then it will all come together. Like I said next year we're very excited about where we're going to be. You know Matt it's a lot of words for saying not much this year but I think a whole bunch next year.

Okay great thanks and I don't know if you were talking about the Viceroy or Prelude when you were talking about how much of your sales force has the product. Can you update us on the rollout of Prelude and kind of where that stands and when it will be kind of up to full capacity?

We won't be up to full capacity until the first of January and that's the ability to produce 50,000/60,000 a month by that time. We've just released to - I think Marty how many new? Okay 12 additional sales people in the last three days and as you recall we only had six or eight prior to that. So we've really had very few people working on it. The tooling for the multi-cavity. Some of those going up is you may recall that it had huge price reductions in capacity. We'll all be online by the end of the year. Some of that is being tested. In fact there's a group of engineers tomorrow going to accept some of the tools. So it's moving down the road. I can tell you that there's huge demand for this in Europe. We've conducted trials in four different countries and the sales force there is just biting at the bit so it's progressing.

On the Vice story we've released it to all the U.S. sales force. They just received their samples however just in the last couple of weeks as we just recently announced that. So the big player in this is the Prelude. The Viceroy is a smaller market but it's out there and we have actually - I don't know if we've received orders yet but we will when we have received orders. So that's in the mill and then of course the IMPRESS catheter will be a big deal. I think the sleeper out of some of these issues and then the drainage catheter as we all know with its patented features. The revolution and the honor will come in later on this year.

Great thanks. And Kent could you talk a little bit about the sequentially it looks like SG&A costs were down about $400,000 while your revenues were up over $2.0 million. Can you talk about where you were able to get that leverage from?

Well in part because we have some unusual expenses in the first quarter that had to do with some severance costs that inflated that a little bit so your comparable a little strained that way but if you pull that out of it then it's pretty flat and so we haven't had to see a lot of increases. There was a little bit of higher commissions due to sales but we were able to save money in some other areas that we had in the first quarter mostly in legal and accounting costs that have dropped down and that was because we were finishing up our 404 testing and some of that seen in the first quarter that were really due to the audit and the completion of the annual report.

Okay thanks and then last question. Can you update us on exactly when - I know you said for Richmond that that facility would be finished around the first of September. Can you update us on the facilities in Salt Lake and how much cash do you have left to spend on those projects?

Let me address the facilities here. We've actually taken and have temporary - occupancy thank you for the new molding facility and the new automated warehouse but we're still about 60 to 90 days before the facility is being utilized to the ability that we want and that's the 12 new injection molding machines and the automated warehouse. As we mentioned and you all know this that the R&D facility is already online. So in terms of cash I'll let Ken address that.

We have a couple of million dollars left to go but it's really going to slow down now. In fact it was interesting because my draws has been between $1.7 million and $1.9 million every month for the last six months or so and then one I just got was for $90,000.

It sounds significant.

The majority of that cash flow is out but there are some lagging costs that will come through as certain acceptances and other things are completed and reviewed. So we'll have a couple of million left in this quarter to go.

But Ken at what point shall we expect pass to start building on the balance sheet again?

We're going to see cash start building from here on out because the requirements have declined and so our cash flow should be greater than what we're spending.

Okay great. Thank guys.

I want to caution you it's not going to go up real fast but it will start right.

Well I think maybe with the $500,000 a month maybe starting in August do you think?

Well maybe.

I think the important point is it will start slowly and then as we bring all this online get the injection molding machines but also spending money for additional automated packaging and those sorts of things where paid half the money up for that. But I wish all of our investors and all of our analysts could be here to see the capacity to see the ability that these facilities and our properties will be able to produce in the future because I think it's just very, very impressive.

Great thanks guys.

Thank you. Our next question comes from Mr. Jayson Bedford with Adams Harkness. Please go ahead.

Hi good afternoon.

Hi Jayson.

Hi Fred. A few quick questions. Just on the catheter growth. It seemed to accelerate in the quarter. What's really driving that? You kind of alluded to deeper penetration into interventional radiology. Is that what's driving it or is there a new product there?

No, I think it's being driven by our micro-access kits what we call our Mack kits. We're adding some additional catalogue items there but that's really what's driving it - (inaudible) forecast for the year. We're up 140% above our forecast. It continues to drive that part of it and that's offsetting some softness as I would say that's in our radiology catheters but now with the new IMPRESS catheter now with the drainage catheter the One Step is also another access. That's our Parisontesis (ph) catheter so just kind of across the board but really be driven by the Mack kit is really the big issue for us basically.

Can we expect kind of low double digit to mid teens growth going forward from catheters?

Absolutely. No question about it. I think lower double digits - but I think you'll see it accelerate even to a little bit better than that.

Okay sounds good and then OEM sales. How were they in the quarter? I know first quarter was a little soft. What did OEM sales look like in the second quarter?

The second quarter. There was a record for our OEM sales. We also have and continue to have great response there and for those that are in the audience and not aware of that we sell products to other medical device companies that do not compete with our direct sales force and we have a couple of other I think new unique opportunities that will be coming online with some other larger companies that will help to use our capacity and as you all know these products I think operated in the second quarter to about a 48 almost 49% gross margin actually ahead of our hospital sales. So we're very excited about the future of our OEM sales as well.

Okay and then since you alluded to that I'll take the bait in terms of other opportunities that you mentioned Fred can you just comment a little deeper I guess on other opportunities whether it's in OEM or other areas of the business?

As we have talked about in the past we have looked at a number of acquisitions and a number of other issues but as we were putting the money into the new facilities in Richmond and bring all of the things online and these seven products you know we were starting to stretch our supply lines and our abilities just a little thin so we've kind of pulled back. However, I would hope that in the next several weeks that we will be able to talk about some additional distribution opportunities of the high margin products.

There it continues to have a presence in the United States and in Europe in which we have now 59 full-time sales people and the opportunities for us to be able to help other companies distribute their products but we have to be very selective but I think we will see one or two of those opportunities with great margins and great opportunities in the future. We're in the midst of negotiations. We're still having discussions Jayson with other companies regarding acquisitions and those things. They're ongoing and while you raise the issue just one other thing that comes to mind that you didn't ask the question but if I could there was an announcement today of facilities being shutdown by a major producer here in Utah and although I'm saddened what that does to the state we're excited about the resource capability for engineers injection molding.

We've had a hard time attracting in certain areas here in the state but there is an announcement today that one of the major players in the community is going to be shutting down their facilities and that's going to be a big deal and start to again help Merit to attract I think local folks who would have to go out and spend quite a bit of money attracting molding and technicians and engineers from outside the state. So that's another thing that I think is going to enhance both for production, engineering and other aspects of the company. So it's not so great of the State of Utah but it's great for Merit Medical.

Okay great. Just from a strategic sense though it sounds like you're leaning towards more distribution arrangements initially and acquisitions are always there but that seems to be on the back burner I guess. Is that fair?

It has been for the last four or five months a couple of things have broken down. I would say that's a fair assessment that until I get everything online. Get my staff so that our facilities up and running I can't have them out having to take and dilute those because as you know the issue for Merit's success going forward is the ability to execute the bringing on the lines of capacity and bringing new products. That's where our focus is and so I think your observation is correct.

Okay and then the 59 full-time sales people how does that compare to the first quarter and what does that look like going forward for the rest of the year and maybe '06?

I'm going to let Marty Stephens answer that.

Okay.

We wound up the end of 2004 with 47 sales people so we've grown since the end of last year by 12 - a little over 25% increase so far.

Plus two of the managers?

That's correct. Those are just people that are in the field so we actually have - if you add those 14 additional people that are in the field working on sales we actually are contemplating hiring a couple of additional. So that's going to be our growth for this year and we haven't put together a growth plan for next year we're integrating this but we expect sales will continue to grow.

And Marty if you don't mind - I don't know if you have the number there. What did the sales force look like at the end of the first quarter?

We had added only one additional territory at the end of the first quarter yet.

Okay. So the bulk of the sale force ramp has really occurred in the second quarter?

Yes, they're in the room right now. All right here.

Yes, live and in person.

Okay great super. Thanks guys.

Thanks.

Thank you. Our next question comes from Emily Johnson with W.R. Hendricks. Please go ahead with your question.

Hi guys it was a quarter. A quick question about the procedure tray growth. Can you kind of guide that for the full year?

I would say that our goal was to add $5.0 million worth of sales for the year but that was only incremental and I guess at three additional on top of the two but right now we have the two and we're ramping at 4.6 so that should put us at 6.6. That's higher than we anticipated and as I have said in previous calls to be very candid we can make the number whatever we want it to be and I'm not trying to sound arrogant on this but as these devices rollout over the next couple of quarters and with higher margins and higher opportunities and our focus we have ways to incent the sales force for those issues will give us the best overall financial performance.

But I will say Emily is that strategically I believe that it was sound. I think we've proven that. I think we've been able to ramp it. We have our manager down there. We put the facilities in place. Our goal initially was to only have 50 accounts for the year and to get it in place we have 135 and we'll probably end up the year at around 200 or 200 plus and with capacity to do many more.

But what we are concerned about is that we want our sales force to spend their time on those that give us a strategic advantage where we have patented features that will allow us to maintain the growth and higher margins and so we handled that by the way incent them and how we commission those kits.

But clearly it has softened the ability of our competitors to take and pick us by putting their products in or substitute products that I believe that are inferior but it also has helped us to create an opportunity when we can go out and use this as a service. We can take and essentially go stick to stitch and I'm just not aware of anybody that has the breathe of products and services that Merit has and for what we do with accessories it really gives us a distinct and unique advantage and the reason these 10 folks are here is because they see the opportunity to make money and to be involved with a good company and they know and I think can feel that there's a lot of excitement and energy in this room. This room is abounding with energy and it is an exciting opportunity and time for all of us.

I'm trying to calm myself down. I mean I'm fired up about our business and about all these folks in this room. So that's a long answer to your question but I'm pretty fired up.

Thanks. One more question. Can you give us some kind of idea where in your business the other five upcoming products are going to come in towards the end of the year?

Yes. We're going to be introducing the Backstop Plus and it looks like that's going to come and be online by the end of August so within 30 days. The IMPRESS catheter which is the new radiology catheter is going to be October, November. The Honor Hemostasis Valve. The Revolution and the R&L the resolve locking catheter drainage catheter are going to be one of them late in November and the other two in early December but everything will be online and I don't know that I missed one. Did I get them all? I think I did. Everything should be online.

Again, I just left my engineers. We committed the resources and everything is on track. We could stumble on one of them. I don't we will. Everybody's compensation in this room is directly linked to the success and introduction of these products, these revenues and earnings for this year including the facilities.

I just gave you the goals for the year. Facilities, top line, earnings and those projects and everybody in this room that's what they talk about at night when they're sleeping.

Great thanks.

They better be talking about when they're sleeping.

Thank you. Ladies and gentlemen if there are any additional questions please press the star followed by the one at this time. As a reminder if you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please.

You have a follow-up question from Mr. Matt Duncan. Please go ahead with your question.

Hey guys. On the gross margin line when do you expect - and I know this is kind of difficult to say because of that pack business but when do you expect that to stabilize? Have we found kind of the bottom here and does it start to build from here and when should we expect to start seeing some growth and gross margin percentage again?

Matt with all these introductions in bringing on the facilities I believe that we probably have stabilized here because we'll see the revenue issues but I don't think we'll start to see it improve as I had mentioned previously until we get these products launched and samples and bring these and start to absorb some of it. So I'm still not looking for improvements in gross margins so probably the second or third quarter of next year and I'm trying to be conservative in that but I just think and both Kent and I feel that with capacity, bringing online, bringing the new equipment with the personnel and the launch of these products it just wouldn't be prudent for us to promise something that we probably can't deliver until the second or third quarter of next year.

At that particular point, I think we're going to start seeing a leverage across the board. You'll start to see more of that in the SG&A. You'll see it in R&D and as a percentage of sales as those revenues come on and consequently in the gross margin above the line as well. So we're still on that same schedule that we talked about. We're not prepared to move it up and I don't really think it's going to but I do believe it's stabilized.

Great thanks and then last question Fred. On the packaging business when do you expect that business to be earning and operating profit?

That's a good question. I believe it's going to be in the first quarter of next year. We're going to again bring the product - the facility online. We put all of our 40 employees on a bus and took them down there last week. They're very excited about it. We see very low turnover. We're getting great support from the State of Virginia but we still have to - but as you recall we don't have a whole lot of operating expense there above the facilities from our previous facilities but we had to hire a facilities manager. We have to have a controller. We have to have a facilities manager. We've had to make some of those expenditures but it won't take us too long until we absorb that so I'm going to say first quarter could go to second quarter but then I think we'll be off and running.

Great thanks Fred.

You're welcome.

Thank you. Ladies and gentlemen once again if you would like to ask a question please press the star followed by the one at this time. As a reminder, if you are using speaker equipment please lift the handset before pressing the numbers and Mr. Lampropoulos there are no further questions at this time. Please continue.

Let me just make a closing statement. I think you can tell from the energy and our enthusiasm that we're on track. We believe that both will accelerate. We believe earnings will accelerate on the plan that we have talked about and at the timeframe. We believe that we are on track to do all those things. We're doing the things and making the investments for the long run. We are building our reputation and our ability to serve our customers in an area that we think is underserved and candidly one in which others don't have an interest in.

There's always competition out there but Merit continues to innovate, build. We've made some new assignments. We have some new adjustments in our staff. I've got a great team on the field. I believe this is a winning team and to continue a winning tradition. We appreciate the confidence. We look forward to seeing you at the conferences. We look forward to reporting success to you as we move forward this year and into the future of our business. Thank you again for your time. We'll be delighted to discuss those things which we can if there needs to be clarification and we look forward to reporting to you in the next period. Ladies and gentlemen good bye and we're signing off from Salt Lake City. Have a pleasant evening. Bye by.

Ladies and gentlemen this concludes the Merit Medical Second Quarter Earnings Conference Call. You may now disconnect.