Merit Medical Systems Inc (MMSI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Merit Medical First Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Fred Lampropoulos, Chairman and Chief Executive officer of Merit Medical. Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. Kent Stanger and other members of our general staff are broadcasting from Salt Lake City. We're delighted to have you with us this afternoon. We'd like to start our meeting by having our General Counsel, Rashelle Perry read a Safe Harbor provision. Rashelle?

Thank you, Fred. In the course of our discussion today reference may be made to projections, anticipated events or other information which is not purely historical. Please be aware that statements made in this call which are not purely historical may be considered forward-looking statements.

We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties and other factors are discussed in our annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission, which are also available on our website. To the extent 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 obligation to update any such statements.

Rashelle, thank you very much. Ladies and gentlemen, again, as I mentioned, we're delighted to have you with us today. As you have just seen, we reported revenues of $51 million versus $45 million, a 13.3% increase over the year-ago period. As I pointed out, it is, I think significant, particularly in light of the sales that we had for last year, and a very, very robust fourth quarter.

Our net income grew 24%. Some of you might recall that I have always felt that a company who could leverage their top line to double that on the bottom line was doing a pretty good job. Our earnings were $3 million, or $0.10 a share, and that was up from $2.4 million, or $0.09 a share. Now, Kent, you're better at this than I am, so I'm going to ask you to explain the $1.09 because it was really up -- the [24] is correct but it was about $0.02. But would you just add that so we can get some clarity?

Well, the difference was partly because of more shares outstanding, but that's a small part of it. Actually, it was about $1.09 per share because of the way it rounds. So in other words, it was a little over $0.085 a year ago and now it's $0.104 is where it happens to be when you look at the decimal. So it's almost $0.02 better.

Yes. So the reason we mention that is so that it looks like it's $0.01 a share, it is, but you have to take a look at the dollar amount and we think that's the significant amount, the 24%.

Now, I point out that our -- that we saw some significant events which I believe are just the beginnings of the types of things that we're going to see going forward. We had a -- when we exclude the inventory that we acquired in the Datascope dialysis catheter, we actually saw a reduction in our inventory by about $400,000. And I can tell you that you'll continue to see reductions of inventory.

And in many ways, this reminds me of where we were back in 2000 as we really leaned out our business and we will continue to see those reductions. And the reason that's significant is we don't have to have as many people build the product, we don't have as much obsolescence and scrap and those sorts of things and ultimately those will affect gross margins.

We talk about some of the newer products that we'll be introducing. In just a few weeks we'll be having a national sales meeting and we're ready now to release the Meritized version of our chronic dialysis catheter. As you know, this is a high margin product. And I've been very pleased by the way -- to the fact that we have been continuing to sell the product in its existing form, but we'll get a real push as we train the sales force and get them out there in the next few weeks.

Our business grew in all categories. The one area that was a little surprising to us as it all rounded out was the inflation device sales were only up 1%. Now, I think this is consistent with what we've seen with other device manufacturers in the angioplasty and the stent business where many people were talking about their unit sales going down.

I would point out that one of our largest OEM customers was flat, so one of the reasons that we didn't see an increase in this particular area was because from the fourth quarter to the first quarter one of our large OEM customers was flat. And we think that has to do with the inventory levels and the things that they had and probably tried to lean out their own inventory.

As a note to this, Merit has a product coming out at the end of the year which is a patented hemostasis valve that we'll be selling in about the $50 range that has about a 90% gross margin. A proprietary product, as I mentioned, and we believe that this will help enhance both standalone sales with high margins as well as combining that with our inflation devices.

We also believe that here are some significant events that we can't discuss but I think are -- there's some knowledge out there, there's some things going on in various other companies that will help, we think, break up some of the monopolies of some of the larger companies and take a stranglehold off some of the market areas in the bundling area.

Now, this will all come to fruition as these plans unfold by other companies in the marketplace but we just believe that there are some underlying events out there that are going to play in Merit's favor in terms of breaking of the bundling business and allow Merit to be in a better position to benefit from that. So we'll see as those things unfold in the marketplace.

The areas, of course, that we are concentrating on -- and by the way, back to the inflation device business. As you all know, that's a relatively mature business in which Merit has a very high market share and one which has been the lowest area of growth for the company. Our standalone devices grew at 20%, our catheter sales at 18% and we expect that, by the way, would increase with our emphasis on some of our infusion products and our new dialysis catheter. Custom kit and tray sales grew at 18% and we already discussed the inflation device.

Now gross margins for the first quarter were 37% compared to 37.9% last year. And historically in the first quarter we see lower gross margins as you have higher expenses without the benefit of the sales volume over the year. These are things like labor costs, which we had previously discussed, because of the very tight labor market in Utah. We had also talked about other factors. Kent, just some --

Yes. The higher health benefit costs [in the] beginning of the year, some [of your] increases in some of the depreciation of projects that we brought on too as we --

As you put those on the books.

Yes.

Our SG&A costs were 23.5% compared to 25% so we picked up some leverage there. And the R&D area as a percentage of sales stayed flat. So all in all I'm pleased with the first quarter. We have not seen the benefit of many of the cost savings programs which are now starting to come into effect.

Let me say this. We had talked to you about at least five product lines with several million dollars worth of savings annually coming. All five of those have now either been selected or are in the process of being moved to our contract facility in Mexico. At least one of them, however, will not be until about November.

There are several of them that are producing. I think we have two producing now, a third one starting up in about less than a month, another one that will start up at the end of the second quarter, and then that final one. So we'll have five full product lines being produced in that offshore environment, which will be substantial. A lot of cost savings products are opportunities for Merit.

We also have a goal as a company to have a productivity [level] per person -- per employee in the company of $125,000 per employee. And so we'll be leaning out and seeing a reduction in our overall headcount as our sales going up, giving us higher productivity and higher gross margins going down the road. So we're doing all the things that I think you need to do to get the company on track, to where we want to be to give us the kind of performance and leaning out of the business going forward.

Additionally, we announced today that Merit's board has approved purchase of up to 5% of the outstanding shares, approximately 1.4 million shares. And we of course will not announce the price to that but we will do that from time to time. We, as you all know, purchased 344,000 shares, 344,084 to be exact, about a month ago. And those shares have been retired. So we will -- and believe that our stock is tremendously undervalued. We believe that it would be appropriate to purchase those shares back and we'll of course make the appropriate announcement.

We will not be able to do that, by the way, until -- the earliest possible we could make if we were going to make those purchases would be on Friday. So we cannot make any of those purchases tomorrow because of the blackout period that we have internally and we would be available to look at that on Friday at the earliest possible time.

Now, I don't want to mislead anybody to think that somehow Friday we'll be in there and buy 1.4 million shares because we won't. But from time to time, based on our best judgment and availability of cash, we ill purchase those shares when we think it's appropriate to do so.

Kent, that's about all I have. Oh, I do have one more thing I want to add and that is the number of new products, yes. Not only do we have the dialysis product, but we have a number of new products in our sheath area that we've introduced. We have the new KanguruWeb that Merit has Meritized. We have the dialysis catheter I mentioned, the Shortstop Advantage. We have at least two new drainage products that will be on the market by the middle of May. So we have a number of new products that will be introduced.

We, again as I mentioned, are having a national sales meeting here in a few weeks to go through and train our salespeople on a number of new products that we have for a couple of days. So we're excited about those opportunities.

I think that pretty well covers it. Kent, do you have anything else you want to add?

No, I just feel like -- I'm pleased with a lot of the financial performance and the indications in many respects of us turning the corner, if you will. It's the first quarter in over two years where we've seen an increase from the year-to-year. And the fact that many of the, I'll call them leading indicators, you've mentioned some of the inventory, and the leverage and the SG&A was also positive.

So I think that things have turned for us and that they're going to improve through the year. And so we're on plan, I suppose, towards what our guidance was that we gave.

Yes, good. Well, I think, ladies and gentlemen, that pretty well does it from this side. We'll go ahead now and open it up to any questions you might have. So if the operator will please come on line and take over from here, we'll go ahead and answer them to the best of our ability.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

Our first question is from Shawn Fitz with Stephens Inc. Please go ahead.

Good afternoon, Fred and Kent. Thanks for taking my questions.

You're welcome, Shawn.

Just as we think about your move to these five offsite manufacturing facilities, Fred, is there any way to quantify the kind of cost savings potential that that might represent as we think about this over the long term?

First of all, Shawn, there's one facility in Tijuana, and we started by building our safety scalpel there, and then we've moved another product, which is now in production, another one that'll come on in a couple of weeks, another one in about in June and a larger one that represents about $0.5 million. If I were to take and look at the annualized savings if all of those were running versus building that product here, it would probably be somewhere around $2.5 million, maybe as much as $3 million.

Now, here's what I'm taking. I'm taking about the differential also in the scalpel, talking about a number of other products and I prefer not to identify the products other than we announced the scalpel would be there. But it's about $2.5 million a year, so it's about on an annualized basis maybe 100 to 125 basis points.

Okay. So, Fred, the bottom line is by midyear 2007 all five of those products should be manufactured there. And is there any reason as we think about 2008 that that cost savings you just laid out is not in the range of possibilities?

I want to make sure I clarify something. All of those products will be running by the middle of the year save one and that won't be up and running until January. We're going to transfer that and the startup date will be about January. So all but one. That particular product represents about, oh, $500,000 or $600,00, that last one. So four of the projects will be up and running and the fifth one will be there by November, okay?

Okay.

And I -- you're absolutely right; there's no reason to believe why those cost savings will not be there on an ongoing basis. Now, the other important part of this is that there'll be more than these five. This is just the beginning. Other projects, which we will move to our contract manufacturing facility, ultimately Merit will have their own facility in Mexico, but that -- in that environment, but that may be three or four years away. But there'll be more projects. These are the five that we had talked about, but they are now all committed. Kent?

There's a couple of points I want to make. There's a delay somewhat of a quarter or so on each of these projects because you have extra inventories, particularly if you're moving them and so forth. So we have some inventory at the, I'll call old cost, to work through on a FIFO basis before the new lower cost inventory comes to our financials. So there's a little lag there.

And second of all, some of the savings lag will occur because of reallocations of overhead that Fred talked about. So either we have to cut some overhead after they're not needed here or we have to reallocate them to new products as they coma along to get all of the savings. And so there'll be some delays before that rolls into the financials. I just want to disclose all that.

Okay, great, Kent. Hey, Fred, maybe just back to the top line. You guys had a very healthy pipeline of product launches last year. I think 17 is my recollection. Could you provide any commentary maybe on the impact that you're seeing right now from those new products and any that are contributing in a particularly strong fashion?

One of the big areas for us is in the area of our sheets. We've just introduced what we call our ACT version. We've introduced our 23 cm, we've introduced, let's see, there's one what we call the Prelude Pro, and so that particular area continues to grow. A number of the safety products and these are in the standalone areas, why you're seeing that particular growth going standalone because that's a lot of those standalone products.

And Shawn, just because you asked the question, another thought came to mind. There's several other things coming down the road that are going to be to our benefit. We have later on this year and in '08 close to $600,000 or $700,000 in royalty payments that will be falling off. Those are some other things that'll be falling off as we go down the road that'll help in our performance. There was one other that came to mind that just slipped from me. So anyway, so the vascular access.

And another area is in our catheter area which again is one of those areas that you're seeing growing. We have a particular emphasis in one or two areas where we really don't have to add any overhead and, candidly, any labor to essentially double our output. And I was just on the phone not an hour ago with one of our sales guys in New York. We replaced a competitor with this product that we had focused on and we've been doing that quite often. So we'll continue to see in some of those catheters.

Now, that is a mature product, but our emphasis is not only on some of these new ones, but other ones that we've maybe not spent the time until we've done some retraining in some of those areas. And we've seen that one particular catheter area, it will more than double the sales this year because of that emphasis and training and kind of a refocus.

Another thing I want to point out, I'm sorry to make this so long, but one of the other things that you'll get out of these move to Mexico is not only do you get the cost savings, but they're so significant in terms of improvements of the gross margins that it allows you to be more competitive and take more market share.

So there are a couple of areas, one that comes to mind that will be up in about midyear that gives us a pretty substantial reduction in cost, and we think that allows us to still go out and make at or above, candidly above our gross -- corporate gross margin levels that we're at right now because of those reductions and increased market share there. So just kind of across the board.

And then another thing we've not talked about and I'll discuss briefly, we have discussed on these calls in the past where we essentially had two, I'm going to call them secret projects that we have not disclosed, one being built here in Salt Lake City and one being built in our facility in Ireland. And those particular projects now are starting to get closer and closer to come to the market. And they're candidly both blockbusters.

But because of competitive reasons, we didn't want to disclose those. But they're coming closer and probably at the end of the second quarter call we'll discuss those. And those are things that we've not even laid out to anybody in the past for lots of good and varied reasons which people will understand once we disclose that.

And then last, sorry, Shawn, to keep you on.

No problem.

The other thing too is our sensor business has been a drag on earnings because we've had to operate our wafer fab down in California and operate one here to be able to make needs for our customers. And this wafer fab is a little bit different than medical devices.

You can't just transfer it, you have to keep both of them and there's a lot of [qual]. By the time we get into the third quarter, that will now be totally up in Salt Lake and our facility in Santa Clara will be shut down. And that's going to have a significant impact on our business, both in terms of its growth and that double drag that we've been getting.

So the stars are lining up for us as these things mature and will start to add to gross margins and sales and everything else. So I think we're starting off the year right and we're working hard to take a look at these areas that will give us substantial improvement.

Okay, great, Fred. Hey, Kent, last question. You alluded to it briefly but bottom line is you're reaffirming your top and bottom line guidance, correct?

We're just saying that yes, we haven't changed it. We still feel like that we're comfortable with that guidance we gave.

Okay, great. Thanks for the time.

Thank you.

Thank you. Our next question is from Christopher Warren with SunTrust Robinson Humphrey. Please go ahead.

Thank you so much for taking the question. Wanted to ask briefly about the Salt Lake City labor market. Has anything changed there?

You know it's starting to soften a little bit but there's a number of things going on here. There's some large construction projects, several billion dollars downtown, there's a new rail system going in. So it's still a relatively tight labor market. But here's the good part. Some of the packaging and some of the initiatives that we've put in in automation that are coming on line are actually going to reduce our need for labor.

And we think that by the end of the year that we'll be operating probably somewhere between 50 and 70 less people in Salt Lake City than we have today. So we're kind of taking care of it ourselves, both with the offshore issues that we talked about and the efficiencies in automation that we're doing here. So we're alleviating it partially by ourselves.

That's great. And a quick question on the inflation business. I know you mentioned on the call one large customer maybe reducing inventories a bit. Could you give us some confidence that you expect those sales from that customer to reaccelerate next quarter?

I can't do that. I would like to be able to do that, but I haven't talked to them. I know that they are reaffirming that their sales are going to grow and they use our product. But I don't have the orders in hand. I don't -- they're not going away. So I -- hopefully they'll firm up, but it's difficult for me to make a prognostication on what they might do and what their inventory levels might be.

Typically have those -- has that customer's orders in the last, say, four to eight months been -- or, I'm sorry, four to eight quarters been accelerating or has there been a little bit of lumpiness in the order flow?

No, they have accelerated and they flattened out in the fourth and the first quarter.

Okay, thanks. And if I could just turn to some of your new product introductions that you expect in 2007, five specifically that we've mentioned, angiographic introducer needles, the Prelude 23 cm sheath, the [Impress 4] French flush catheter, the Prelude drainage catheter and the biliary drainage catheter. How many of those are in the market and of those that aren't, do you still expect those launches in '07?

The only one that is not in the market today is the biliary and that is at FDA for approval. And I think the Resolve, the Prelude, all the ones that you've talked about are all in the marketplace as we speak today save the biliary, which is again we're waiting for approval from the FDA.

And we've continued to strengthen the Prelude recently by adding some new versions that were -- are very helpful to fill out the line.

And we will also be introducing in the next -- in fact, we're doing trials this week on Merit's new radial artery introducer sheath. It has a much higher ASP and that'll be introduced probably in the next, I would say, 30 to 45 days as well. So there's another one that will come out. We're kind of -- we're loaded. I mean we have some new drainage products that are coming out in the middle of May. So we've got plenty of new products.

Okay. One more question and this relates to some of your comments on a potential bundling competitive situation improving for you guys. Can you give us any other insight or talk about the areas that that might be relevant to should it, in fact, come to fruition?

I think it would affect all of our areas. As you know, we compete with the likes of Medtronic, Boston Scientific, Cordis, Abbott, some of the big companies. And we just think because of some of the things that are going on internally with those companies that they will either be shedding product lines or consolidating and doing some things we think is going to kind of take the noose off.

Some of it will also be that some of these other companies will be coming into the market with products and so instead of having one or two, you're going to have maybe three or four. And so whatever you get back to that, it's kind of like the old days when you had four players instead of two. And we believe that a number of factors, but you'll see this as it plays out in the next several weeks.

Okay. Thank you very much for taking the questions.

You're welcome. Thank you, sir.

Thank you. And, management, there are no further questions at this time. Please continue with any closing remarks you may have.

Well, again, ladies and gentlemen, let me assure you that we are up to the task, that we believe that the plan that we've put into place will simply help Merit to make more money and more money will translate into a higher stock price. I want the staff to know that I appreciate their efforts. We're working hard. We're focused. It's pretty intense around here and it needs to be. We believe that the products, our strategy are sound. We hope that and believe that in the future we'll be able to come back and report improved results.

Now, as Kent pointed out, we have every reason to believe that we will be on our numbers, which were around a 20% to 25% increase in earnings for the year over last year and we'll also be there to defend the price of our stock. We believe the company's shares are undervalued. And we'll be out there working to affect the value for our shareholders. So we thank you for your interest.

We'll be out also in several conferences out in New York in the next several weeks and we have four or five that are planned that we've been invited to so we hope to also be out working with institutional investors and with the various firms that are supporting us to tell our story. So we'll be very active now that the year end is over, the first quarter is out, and we're going to be out telling our story.

So we appreciate your interest. We thank you and we'll look forward to reporting to you in the near future. Signing off from Salt Lake City, thank you very much and good night.

Thank you, sir. Ladies and gentlemen, this concludes the Merit Medical first quarter earnings conference call. We thank you for your participation and you may now disconnect.