Merit Medical Systems Inc (MMSI) 2006 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS]

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

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos with members of our staff for broadcasting from South Jordan, Utah. Thank you for joining us. We're delighted to be with you today. As we begin our meeting, we would like to have Kent Stanger read a standard disclosure statement. Kent.

The course of our discussion today, reference maybe made to projection, anticipated events, or other information which are not purely historical. Please be aware that statements made in this call which are not purely historical maybe considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties, and other factors that could cause our results, our actual results to differ materially from those anticipated in such statements. Many of these risks, events and uncertainties, and other factors are, are discussed in our annual report on form 10-K and all other reports in the filings with the Securities and Exchange Commission which are also available on our Website. To the extent that any forward-looking statements are made in this call, such statements are made only as of today's date and we do not assume any responsibility to update such things.

Thanks, Kent. And good afternoon again, ladies and gentlemen. We've just reported a record quarter in terms of revenues of 48.1% for the second quarter compared with 42.4 million for the second quarter of 2005. I would like to point out that our growth in the second quarter was 13.5% versus 9% in the second quarter of last year. And the first six months of this year, our growth was 13% versus growth of 8% for the first six months in 2005.

Merit continues to have no long-term debt. We have assimilated one full business and two product lines in this quarter. And I think most gratifying is the fact for the first time in eight quarters, our gross margins have turned positive or are on the upside and averaged 39.5%.

In the last two months of the quarter, that would've been May and June, our margins were almost 41%. And if we exclude the trade business which accounted for 220 basis points, our margins for the quarter would have been 41.6%. I think it's significant that the plan that we put into place to, to restructure our R&D, to add salespeople, and to essentially double our footprint worldwide, was the right thing for the business for the long term. And I'm pleased that we've started to absorb the expenses of those acquisitions. And we've had the benefit of the investments that we've made in our sales effort.

We have numerous new products in the pipeline. And some of which I am not going to talk about today to any great extent so as not to tip off our competitors but I will tell you that I believe that as we enter late third but the fourth quarter of this year that we will introduce the most significant products of Merit's history. And I believe then propel our growth into 2007 and there on.

All in all, I am very happy, particularly on the gross margin side. I also would acknowledge because I, you know, we have to be acutely aware of all of the factors that our profits are not as much as they were of course last year. However, I believe that Merit is in the best condition of a company and will move on in the future in quarters and in years ahead to exceed the gross margins of the past and move our business into what I believe is a premium business. So all in all, my staff is all present today. It's going to come down to execution. We're not like, unlike other businesses that always have some ongoing issues.

But all in all, I'm very, very pleased with the performance of the staff and of the sales effort particularly domestic, international, OEM for our business. We continue to invest heavily in research and development as we go forward and have some new and exciting technologies again that are new to our company, that we are investing in that will expand to new market opportunities in our current call point.

Also as a point, there is something I picked up this morning is that our cash position according to our press release was 7.6 million as of June 30. But as of, I think with this morning, we are well over $10 million so we continue to build our cash position.

Growth was in all sectors of the business. It moved around a little bit from the first quarter. I, of course, would be happy to answer your questions regarding that and in just a moment. I think that pretty well covers all of the issues and we would probably be better served to hear from you in terms of the questions you might have.

So again, a record quarter, a turn in gross margin to the positive time for the first time in eight quarters. And the sales force and people that we hired clinically in the third quarter of last year are now fully trained. And I think everybody out on the sales side is in full stride. So we're excited about the future. I think that this was a positive, a very, very positive release. At least it is in our mind. I looked at a couple of comments that went out earlier today. And it seems to me that from some of those comments that we're ahead of some of, some folks out there on the streets who had kind of sold us short so to speak.

So that being said, I will go ahead and turn the time over and answer any questions that we may have from our investors. Thank you. At least, I think I'll turn the time over. I won't turn the time over because no one is cutting in. So I'll just keep talking. But if our host is on the line, we would then ask her to go ahead and step in here at any moment and, and then start to line up our phone calls. If you'll start getting ready for those and prepare your questions it would certainly be appreciated.

Thank you, sir.

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Our first question comes from Arnie Kaufman with Brean Murray, Carret & Company.

Hi, guys.

Hi Arnie, how are you?

Good, good. First question I have is the, you mentioned your gross margin in the latter part of the quarter were up pretty significantly, it seems like 41%. What would you, well, can you sort of pinpoint and attribute that where this increase is coming from now?

Well, I think that it has to do with both mix and then just general volume and absorption. In the first month, we had a little bit lower sales. But in the last couple of months, we were ahead of our forecast, our own internal forecast. So I think it has to do both with absorption and some mix. Kent, you want to address that?

Yes, it's primary volumes. We're increasing volumes with sales on some components are relatively fixed cost. Most of those facilities and some of our big cost increases we've had in the last two quarters or three quarters are now being absorbed by higher revenues. We also have added some important products that are starting to come on the McTech business, the new scalpel business and even some to the honor of those new acquisitions are adding higher margin sales in these quarters as well. And that's to press point on the mix.

Right. And another question. Can you address your guidance? I know, it was at the end of March, right, that you gave out some guidance for '06.

Arnie, our guidance was 181.

Right.

185 to 189 and 41 to 45. And we don't believe it's prudent to adjust anything at this point as we enter into the seasonality of the third quarter. We're just, you know we tried to hedge a little bit in terms of even the margins because the third quarter is always kind of, a crap shoot. You just don't know what's going to happen if over time, it isn't. And some occasions affected our margins by as much as 150 or 180 basis points. But then we come back very, very strongly and then have our, our strongest three quarters in a row.

So I think what we want to do is, is to get through. We have a couple of major high margin products that we'll be introducing in the third quarter. And I think it would be appropriate for us to make sure that we finish our, our bills of that product. And wait till we get through the third. Because I just don't want to stub my toe in, in that third quarter. It's just always, it makes me a little nervous.

So, we're not going to adjust anything at this point. But we will take a look at it as we come into the fourth. We are starting the budgeting process and forecasting for next year. And so we'll take a look at our next year and the fourth quarter. And we'll take a look in at the appropriate time, we will, we will then take a look at whether there should be adjustments. But we're not prepared to do that at this point.

Right. And regarding the new products that you, you just mentioned that will be coming, the majority I guess would you say are higher margin products that…

Yes. We, we've been working on several areas and we're talking about these which could be major dollar volumes in the range of about 65%. So we think that's going to favorable to our overall gross margin and our mix. And we think that's going to, I think over sometime. I don't want anyone to misunderstanding the comment when I said that the time will come in the near future when we'll exceed our previous high of 44.5%.

We've got some time to get there and do that. But the point I wanted to make, Arnie, is that the organization is prepared, has plenty of capacity reserve. And so we'll be able to do and absorb a lot of this and move forward. And I think it's going to spell higher gross margins and higher net after tax profits. And also to your question, Arnie, also we're starting to get the leverage in the SG&A lines. In the second quarter, our SG&A was 23.5% versus 25%, the first quarter which goes to what Kent is saying. It's just simply higher volumes in execution.

Right. One more question and then I'll get back into queue.

What about the, as far as, what you're seeing on the pricing front? Is, is any of your improving margin also related to pricing increasing at all?

I wish, yes, I wish I could say it were.

Yes.

The fact of the matter is we don't have a lot of because of our national contracts and that sort of thing. This is strictly volumes and mix. And, and execution absorption. So, no, we're not out raising prices in any significant manner. Simply because we are on national contracts with so many different players. That, that's a very difficult thing for us to do.

OK. And actually one more. Could you just remind about what percentage is it overseas that your revenue?

About 26% to 27%.

26% to 27%. OK. OK, I'll get back in line. Thank you.

It was nice to hear you.

Our next question comes from [Marty Klenchek] from [Koyser] Capital Partners. Please go ahead with your question.

Congratulations, guys. How are you, Fred?

Good, Marty. Thank you.

You had mentioned that, you know, Q3 is season week for you and you could have as much as 150 basis point move. But with you guys ending the quarter at about 41%, do you really see yourselves getting much below where you came in on Q2?

Well, it's just the summer. Historically, we have seen that you have saw, it's not just us. It's about every major medical device company. You see that coming from overseas. There are some physician strikes in Germany. There are some vacation issues. And then just generally a lot of people go on vacation. And some procedures are elected. Whether it be EVLT types of, excuse me, not EVLT but venous therapy types of procedures or other types of things. Some of these things can be held off and so you know, it's always, we just want to hedge that a little bit. Just simply because that's been the history and we just don't want to you know say anything foolish in light of that.

You don't see any major deterioration from like the 39? You'd see more major deterioration from the 41.

I think, first of all, I don't see any major deterioration.

OK.

But, but I, but it's just that I, I'm trying to hedge that you could see lower gross margins in the third quarter. But that I think the important point here, Marty, is that we believe that we have turned the corner and that we will after as I pointed out in the press release, after the third quarter this seasonality that we will continue to see quarter over quarter improvements in gross margins going forward.

And that's what we're really pleased with. Because it tells us that the things that we did, the investments that we've made, the training, the sales force, well, in both in profit margins and gross margins that our plan's working.

OK. Fair enough. And then just one question on the mix. You seem you had an acceleration in growth in standalone devices and a little bit of slowing down in the catheters. Can you address this and why?

Yes, go ahead, Kent.

Well, there has been a couple of items that have jumped in there. One is our, the scalpel business is an add that we didn't have a year ago. So that's one of our top 10 growers and it's in standalone. PAL, which our new labeling device labels product is, is also in there.

Another one is the McTech business. Its, its part of our standalone businesses, by default, kind of falls into there too. So those have been creating growth in that area that has accelerated recently. The, the catheters are still growing well. But it, it's similar cardiology catheters that was growing fast that slowed down a little bit.

I would expect however that our catheters will continue to be a premier performer. And in fact, will, will I think accelerate growth in that area as we go in to the later half of this year.

OK. Thank you, guys. I appreciate it.

Thank you, Marty.

Our next question comes from Shawn Fitz with Stephens Inc. Please go ahead with your question.

You're there?

Yes, sorry.

Oh, that's OK.

Good afternoon. And thanks for taking the question.

You're welcome.

Just first off, I know, you all talked fairly extensively about some of your new products you launched. The seven recently launched products. Would you be willing to give any details in terms of one, any one of those that seems to be doing particularly better than the others? Or just give some additional anecdotes at it relates how those products are going in the market adoption and what the opportunity is.

Yes, I think one of the things I've tried to express this and I hope I can clarify it. What we were trying to do and to express over the last 18 months or two years more than the magnificent seven, was really the fact that we had restructured our research and development and put it in a posture in which new products could flow through the organization much quickly.

And so those seven were representative of that effort in some pretty significant markets and opportunities. Of those seven, the largest one and the most successful one is our vascular access product which is our Prelude vascular access sheath. And so that, that is probably the star of that group. Some of those were a little bit later, the Honor hemostasis valve because of an acquisition didn't really get introduced until the second quarter of this year.

But more significant than just those particular issues is the fact that we're rolling out new products pretty rapidly. And that we've had a change in the way we do business here. So since those seven were announced, we've actually introduced closer to 14 additional products, or product line extensions above the seven.

So I want to make sure that it's understood that that was more of a statement. These are the new products in the market opportunities. Some of those have been stars. A couple of them have been laggards. For instance, the TriplePlay or some of the safety products haven't been a big deal. But the one that, one that really rises to star status is the Revolution, which is our new fixation device. We're getting great gross margins on it. The Prelude is another one. Now the Honor hemostatis is another one and so on.

But more significant than that are things like the MAK, the S-MAK, the stiffened micro access kit and the whole MAK which has accelerated on a ramp races to, to basis to about a $4.5 to $5 million business. So I think the comment again was that there are a lot of new products that are significant and that we expect that are introduction of new products, products which are differentiated with higher gross margins will continue substantial, in fact accelerate, going forward. So that's the comment.

I'd like the message to come out as that it wasn't just those seven. It's the other 14 and the next 14 that are coming over the next 18 months that I'm really excited about. To differentiate Merit from any other company in terms of our size and the market points and the call point we call on has the ability to come up with great ideas that help to improve medicine.

OK. Thanks, thanks for that clarification, Fred. Just, just what do you think about your current portfolio products that you have in the marketplace now? Can you get to your historical eye in terms of gross margin performance with the portfolio products you have now?

With the portfolio products that I have that will be released by the end of this year and product extensions of that portfolio, the answer is yes.

OK. And then just as we think about kind of just the schedule relates to timing of those product launches, Fred, and any kind of regulatory issues. How should we go about quantifying or handicapping the timing of those launches and…?

Regulatory of issues has never been a detriment to the sales and never in our history we have a great Regulatory Department and we have timely approvals. So I don't think those things are handicapped and I expect that we will get all of the products will fulfill what I believe will exceed in those gross margins should be released this year and in the first quarter.

Some of these are product line extensions that fill out and give us great opportunity, so I'm going to come back when I said yes this year but we have some that will expand into the first quarter of next year but by that time, I believe, that the products that we have that will be introduced by the end of this year and some product line extensions of vascular access products in the first quarter, will take us to gross margins beyond where our previous highs have been.

Not, not in the first quarter or in the second quarter but over the intermediate term and I'm going to say 18 to 24 months we will, in my view, clearly exceed those records of the past. And that I think is a significant thing for all of us to understand because you can look at the leverage of the SG&A line, the R&D line, and then we are going to see those kinds of returns that are going to put us I think in premium company status. Kent do you have a comment on that?

Yes just that, I just wanted to tell them because I believe that we can reach those levels but two things that you have to keep in mind is there's going to take some time and some quarters and years to absorb these capacity investments that we've put in. We started on that path, we predicted that when we continue to do so but it will be a gradual evolution of increasing volumes against relatively fixed overheads and it will take some time to do that.

The other factor that will weigh in there is how fast the trade business grows. That as Fred said, now this quarter it was a couple, over a couple of basis points, couple of 100 basis points, in that margin at calculation. So those two things may slow that total from rising more rapidly but if it doesn't grow as fast it will…

I'm going to temper his comments by saying that I think the products that we are introducing will have so much of the sales peoples' interest because of how they're incentivized that and because of the differentiation we have that, that we can control in a lot of ways and we have our hands on the controls. We can control what our sales people sell to some extent. So Kent's comment, I think he was saying the same thing I said, it's going to take time to do it.

Yes.

But the point that's significance is the quarter has been turned and we've seen through those last couple of months with some higher volumes that, that goal is something that is attainable. So you know again, we're I think very excited here about the opportunities of Merit.

Great, hey Kent just a bit of a housekeeping question, could you tell us what the stock-based comp was in the quarter?

Yes, it was 3– I've got it right here, it was about 300. Where did I put all the–

About a penny a share, I think.

Yes it was about a penny, but I have the breakdown exactly.

It was $0.49.

After tax yes.

And net of tax it was 249.

Net of tax, you said it was 249?

Yes.

OK, great thanks guys.

Thank you.

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Our next question comes from [Paul Valencio] with [Vineyard] Securities. Please go ahead with your question.

Congratulations guys on a good quarter.

Thanks Paul.

Couple of questions. Listening to the conference call last time you guys, Fred, you had indicated to kind of watch what was going on as far as stock buyback and I was kind of wondering because I hadn't seen any releases regarding that.

And secondly, I noticed in your press release, you're saying how much you've increased, I know that buildings have been purchased, and you know the companies you've been purchasing in the past couple of years, the larger the increase for capacity reserve and my question is just looking into the future, what is the company going to do?

I know that you've hired more sales reps. How soon do you think you are going to be able to fill the walls so to speak. You're also mentioning new products coming in the next 18 months. I was just kind of wondering if you can give us an overview of that but also interested in that stock buyback.

First of all, I thought I'd made it clear in the last one that I did not think nor does Merit, have a plan in place to repurchase shares. What I did say is that I personally would be buying shares which I did. I purchased in the open market along with another director, some shares in the open market and I think that's what we are referring to.

But I was asked the question whether I thought, it was the right thing for us to do. The problem that we have with repurchasing shares is three years ago we had about 50 million in cash, which we used essentially for these expansions that we discussed.

With the cash level at around $10 million, as of today and 7.6 million at the end of the quarter, that's not as much cash as we'd like to have and we think there are some product opportunities, some acquisition of product line extension opportunities for purchase that we want to kind of keep our powder dry.

Plus I think it's just prudent to have a reasonable amount, so I don't see at least in the near term that we're going to do any of those things although we could make a purchase of, an asset purchase or something like that of a company or a product. But I don't see that we're going to be in the market to purchase shares. Now, as our cash position grows and Merit become stronger and if we can't see that there is an immediate opportunity, then we may take down the road. But certainly I don't see that scenario for a company repurchase through the end of this year. So I think maybe if depending on how the stock performs through the end of the year, we'll take a look at it. But we want to build up our cash reserves.

Let me go to the issue of capacity. We have substantial capacity in a number of areas and there are some other areas down the road that we're and some in the near future that we're going to have to look to invest in. As an example, in our molding area here in Salt Lake City, which is really kind of the gatekeeper for all of the things because we inject and mold our products. We are probably at somewhere around 55 or 60% capacity at this particular time.

Whereas last year this time, I mean we were well over 100% here and we were farming stuff out. So we have substantial opportunity there both in terms of cavitation and in just raw footprint. We have plenty of room, we did bring on 12 new injection molding machines, which are being depreciated more part of that, cost that was showing up on our gross margins which were now starting to absorb.

We have capacity in Ireland; we have almost 10,000 square feet of vacant clean room. However we've now committed that space for product development over there. So it's vacant today but it's committed and it'll be filled up, we think over the next year. We have some clean room space here that we're using where the old molding is and so we have space here for expansion. Richmond, Virginia we have pretty substantial opportunities there. We probably have close to 10 to 15 thousand square feet of clean room there and I also mentioned one of the other things we can consider and we're looking at is the possibility because of labor markets or other things or possibly doing or just better in more convenient, efficient manufacture the possibly that we may actually do some devices there. But the point is you know despite the strategy that there are significant opportunity there in terms of space.

The only one that we are going to run into a wall is in our Angleton area down in Texas where we build our catheters and we can either move things to these other vacant spaces or we can do an expansion down there. That's the one that is kind of the one that's lagging and that we have to kind of get on to get more capacity down there.

So the Richmond, Ireland and Salt Lake City, probably 2 or 3 years and for molding probably 6 years. So we always have to kind of keep a close eye on all of this stuff. And then last but not the least, I think you wanted to talk about the product line extensions and new products.

There are at least one R&D project that I'm not going to talk about at all until the day I launch it. So I won't talk in advance, you won't hear it but when it hits it will shock some of you and shock many of our competitors.

Secondly, we have a number of product line extensions in our vascular access. We've talked about that in the past. It is consuming substantial resources for us to fill up the entire line of our vascular access business. This would include our sheath introducer where it requires radial artery 23 cm, marker bands, ACT's, and a whole bunch of things and all of those will be introduced no later than the first quarter of next year.

And then one other significant product that I think again in the 65% major market opportunity, major advantages and we hope that that will be introduced in the next six weeks and you'll start to see that ramp up in the fourth quarter and when we hit ‘07, I think it's going to just knock your socks off. So that's a pretty rosy and optimistic forecast of the things I think we're capable of doing. Hope I have answered all of your questions.

Mr. Lampropoulos?

Yes?

There are no further question at this time. Please continue.

Well, ladies and gentlemen, in the business of building medical devices and running a business in general, you have to continue to innovate and you have to expand and make investments. As the old saying goes, you have to spend money to make money.

Clearly we've done that. We also have restructured and considered our ways about how we run our business, how we can be more lean, how we can be more efficient, how we can reduce our inventories and get the types of returns that we think premium companies are capable of. I think that we have made the decisions that needed to be made, our stock has suffered, our shareholders have suffered somewhat because of those but they were the right decisions for the business for the long term.

We believe that our future is bright. We believe that we are going to move forward in the years to come to set record profits, record margins and continue to grow our business in a manner that would be pleasing to the shareholders, both old and new.

We have great opportunities and while our competitors are focusing on other areas of consolidation and absorption of businesses and things like that, they spend less and less time in the areas in call points that we are involved with. So we just want to let you know that we're here, we're here for the long term, we are serious about what we are doing, we have great opportunity and will look forward to reporting in the future and hopefully, we can regain your confidence and, and have more calls like this in the future so that's our goal, just to get a good return for our shareholders; not just a good return but an above average return for our shareholders.

Even though the healthcare sector was today downgraded by some analysts in various areas, we continue to believe that our business in places that we call on with our innovation and product mix and breadth of product is going to continue to carry the day. So that's our message, we appreciate your interest, we appreciate the questions.

I'm sure that some of you will want to do further analysis into the information we provided to you today. You didn't have a lot of time to look at that but we'll be happy to visit with you if you call us to go over the numbers and to clarify whatever we can to your benefit and ours as well.

So thank you again, thanks to the staff for a great quarter for your interest and we look forward to report in the future and at that point, we will go ahead and sign off from Salt Lake City wishing you all a very good evening and we will look forward to talking to you soon. Thank you very much, good night.

Ladies and gentlemen this concludes the Merit Medical Systems 2006 Second Quarter Earnings Conference Call. Thank you for participating and you may now disconnect.

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