Merit Medical Systems Inc (MMSI) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical third quarter earnings conference call.

(OPERATOR INSTRUCTIONS)

As a reminder, today's call is being recorded, Thursday, October 25, 2007.

At this time I would like to turn the conference over to Mr. Fred Lampropoulos, Chairman and CEO.

Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos, Kent Stanger and other members of the staff in Salt Lake City. We appreciate you taking the time to join us as we discuss the detailed results of our third quarter.

Before we get started, I'm going to ask Anne-Marie Wright to read our Safe Harbor provision. Anne-Marie?

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.

Thank you, Anne-Marie. I appreciate it.

Well, ladies and gentlemen, we are pleased to announce our results for the third quarter, which, as you all know, is seasonably the slowest quarter of the year. We reported revenues of $50.6 million, and that compared with $46.7 million for the third quarter of last year, an 8% increase. For the nine-month period we were at $153.4 million, compared to $139.9 million, an increase of 10%.

Income for the third quarter was $4.3 million, or $0.15 per share. I believe that the Street estimate was $0.12, and that was part of the reason for our pre-announcement that was both the earnings improvement to the upside as well as the improvement in gross margins, which improved sequentially about 140 basis points.

I think the biggest story and the thing that we're most pleased about is that we were able to accomplish this in this seasonably slow area, and I think it validates the plan that we've put into place regarding our cost structure, offshore improvements and materials that we buy and the lower head count overall for the Company. I want to thank the staff for their efforts and their focus on these particular areas, and I think the more important issue is that as we look forward into '08 and the balance of this year, but particularly as we look at '08, that the cost structure of the inventory that's going on the shelf and how gross margins will look will continue to improve next year.

Now, our plan, and we've said this before and we don't want it to change, and to reiterate that, we believe as a company that we are capable of improving our gross margins yearly by 150 basis points in '08, '09 and 2010, with a 25 to 40-basis point improvement on the SG&A line. Now, as you all know, we will be moving from a base this year of about 38.3 to 38.6, and so when we're talking about that 150 basis points plus the SG&A issue, that would be added on to that 38+% that we'll have for the full year. The important thing, I think, to recognize is that the actions that we've taken, the way that we've structured our business, will help to accommodate those improvements.

Now, I'd also like to point out that the mix, I think, is a very important issue. As you can see from our release, we're selling the things that we want to sell. We certainly would like to sell more of them, but our catheter sales grew at 18%. Inflation devices grew at 10%. And I think that I want to just discuss briefly that some of that growth came from the business that we have with (inaudible), but while other DES procedures and general balloon procedures have been going down, Merit's been holding their own. So those have not declined. The value, of course, is that (inaudible), with their additional orders, improved dramatically, and it's nice to see that those inflation device sales have improved. We believe that they will continue to improve and that we'll continue to gain market share as we go forward because of the introduction of the All-Star hemostasis valve and some new inflation device products which we'll be introducing in '08.

Kent, did you want to comment on that at all?

Well, I'm just really pleased, too, at the progress we've made in our basic cost structure, and one of the things I think indicate that is we've had an increase in our gross margins not only the first time compared to a year ago for probably almost three years, but also that we've had a second sequential quarter, so for two quarters in a row, and it's been almost four years since we've been able to do that. So I think that indicates that we've really got a trend and a significant change in our basic cost and our profitability.

Appreciate that.

One other thing that you'll notice is that the growth in the procedure trays and custom kits was 2%. There are a couple of things that are important with this. One, previously, a large OEM customer who discontinued doing business was part of this. And then, secondly, we have been focusing on other areas such as catheters, inflation devices, standalone products, which have higher margins. And so the thing that I think is important is the way that we're structuring and focusing our business accommodates the proper mix that we'd like to see.

Now, I'll also say at the same time that if we want to -- and I don't want this to come across wrong or be pompous in any way -- but if we want more business on the kit and on the tray side, we think we can incent that and have the sales force get more business. We want them, and our incentives, our contest focus has been on other products like our hemodialysis catheters. They'll be on our new [sheets] and those products, which we think help the business in a better way. But we could get more aggressive.

Now, one of the interesting things also that goes along with a lot of this, I just returned this morning from Washington from the TCT, and one of the things I saw there was a lot of great and interesting technologies. I saw, I think, a leveling off, and in talking to a bunch of physicians, they felt that things were at their [lower] point, in fact were improving. But I also saw that there's an awful lot of disruption with sales forces with all the layoffs and consolidations and other things in the industry. We think that's going to play well into our hand. As Merit provides new products, our people in the lab, we're consistent and reliable. And we think that as we move into '08, that as this disruption continues in the marketplace, just from all the shakeups, that that's also going to play to our benefit.

I'd like to go over some other issues that I think you'll hopefully find interesting. As you all know, we continue to have zero debt. I will mention that we bought about a -- approximately 110,000 shares of common stock in the open market at our set price during the quarter. In terms of that effect on earnings per share, however, it was negligible. So, I mean, it was really in the noise. But we did buy 110,000. This is in addition to the 344,000 shares -- 344,088, to be exact -- that we bought from an investor.

Cash on hand as of yesterday was $16.4 million. That's the highest level of cash that we've had in a long, long time, but I think that also validates the things that we're doing with our business.

Inventory, I think, is also very interesting, is that inventory from the quarter went down about $1.6 million, and we actually have $2 million -- $1.9 million -- less inventory at this time than we did on December 31 of '06. So the closing of '06, we're down almost (inaudible) dollars in inventory. The advantage of that is, of course, we have more cash. We have less obsolescence, less scrap. And yet we have essentially a very, very small backorder. So we're building the right things at the right time. And I think that will -- it's clear that having that kind of cash on hand is a huge improvement in our cash position.

Kent mentioned the issue of the sequential improvement. A couple of other things regarding earnings that I think that are important for you to hear -- in the third quarter, we had a $313,000 severance cost before tax, $218,000 after tax. So that was an expense in the quarter. We did, however, receive approximately $300,000 in a tax credit from FIN 48, and this is the allowance through the financial standards that we have to do where we drop off a tax year and a reserve that we have and then go forward. So essentially the statute of limitations expires and we pick it up. And that will be the case each year going forward. And that represented about a penny a share. But, again, it would've essentially been offset by the expense. So the gain of FIN 48 and the expense that we had on severance essentially wash out, and so the earnings are real earnings, not a function of the shares or a function of these other transactions. It's real and significant.

And we think that going forward that many of our plans are still in the operating phases. There's still a lot more to come out of the business as we continue to transfer products to Mexico. We have another two or three significant products that we hope to have transferred there by late first, early second quarter.

In terms of new products, I'm pleased to tell you that we have conducted market preference trials in Europe on our new [high-beam] marker band introducer sheath and our radial artery sheath both in the United States and in Europe, and those are now being actually sold in the United States and Europe, save the marker band, which will be later on this year. It will be filed this week with the FDA. The All-Star is selling in Europe, and the first supplies arrive this week, but we already have orders for them. And we expect that before the end of the year the All-Star hemostasis valve, which is a 90% gross margin and patented product, will be available here in the United States. All in all, in the next 90 days, we expect seven new products to be introduced to the market.

Now, I want to mention this. A couple of years ago we had a product group which we called the Magnificent Seven. And we talked about that, because we had had some difficulty because of being at full capacity of getting research and development products out the door. And those were seven products which we were going to introduce for the full year. It's interesting to [note], in my opinion, that in the next 90 days we'll introduce seven new products just in the next 90 days. They are the 4 French IMPRESS Radiology Catheter -- this is significant because the 5 French has been on the market, but it's difficult to go out and sell just the one catheter when the labs use both sizes. So we'll see, I think, a dramatic improvement in terms of those selective and nonselective catheters; an 8.3 French Pericardiocentesis Tray; the High-Beam Introducer Sheath -- this a marker band introducer sheath; the Prelude Radial Artery, which I alluded to; the (inaudible) Torque Device, which we're selling in Europe and expect to have cleared in the United States soon; the All-Star, which I mentioned; and the 15cm MAK Micro Access Kit. All of these products have in excess of 50% and some of them much higher.

In addition to these, there's another four or five products that we'll roll out sometime in the first quarter of next year. I'm not going to allude to those right now, but there are a number of other ones coming out.

In terms of guidance, let me just say that we expect that our revenues for the year will be approximately $205 million, which is about 8%, and what we're trying to do here is to be conservative in light of the market conditions. And I'll also mention as we look to '08 that we're also going to be conservative again and probably look at that same rate of an 8% rate of growth for next year. It could be between 8 and 10 next year with these new products, maybe better, but I think it's better for us to come in at these levels which we feel comfortable with and then we'll hope for the best.

In terms of earnings this year, we expect to come in on the low end of our original $0.52 to $0.55. Now, let me refresh your memories that the initial forecast before we saw a falloff in some of the radiology -- excuse me, cardiology procedures and so on and so forth was $215 million -- $213 million to $217 million, to be exact. Our number now is $205 million. Despite that, we believe that we will be on the low end of the range, and I think that was $0.52 to $0.55. Kent, was that correct?

That's correct.

And we still expect to come in on the low end of that range, and I think that is a compliment to the staff and everybody for their efforts.

Our DSOs are about 43 days. We're working on two or three acquisition opportunities. In fact, we'll be leaving this weekend to visit a company and the following weekend to visit another company, so we're still actively looking at opportunities which we think will enhance the Company's performance.

I think that pretty well sums it up. Kent, is there anything you'd like to add?

Yes, I'd just like to say I also appreciate the cash flow from operations has really improved. It's almost $22 million, compared to $14.7 million a year ago. So we're seeing the effect, I think, of efficiencies in our operations. (Inaudible) I think the lower head count. We're down from the high point earlier in the year of about 250 people. Almost all those are through attrition. And what we're getting, then, is a multiplier or an advantage throughout our organization and mostly in the operations group (inaudible). So I think that's significant. And we're seeing a little bit of leverage in SG&A and R&D, as well. (Inaudible).

And one thing I didn't mention that I think it is significant, so that I can tie this down for you, we indicated -- and if we look at last year's gross margins for the year, they were 38.3, I believe, for the year of 2006. And we believe that as this year wraps up that's about where we'll be. We could be slightly higher than that. One of the things that will affect us in the fourth quarter is because of these moves of product to Mexico, we expect to see probably about 100 basis point reduction in fourth quarter gross profits. Now -- gross margin. Now, I want to make sure that you understand what's going on here. This will be a -- we believe a one-time issue, and it really is the fact that we have unapplied overheads. And I'll give you an example of it.

We can save on a product $4 if we move it to another location. Half of that is in labor and half of that is in overhead. But since we still have that overhead, we really only get the benefit of the $2, and we have to fill that space up with other property or other product, or we have to eliminate that overhead. And because of other business opportunities and space and things like that, we continue to carry some of that overhead -- not all of it, but some of that overhead. So we believe that in the fourth quarter -- Kent, do you want to comment on that?

Yes, I just want to add to that is that another thing that affects that overhead application is that we are reducing our inventory. We're being a lot more judicious about the amounts of inventory we have. And that means we've lowered production. I mean, we've had a little slower sales, as we all know, in the third quarter, but our production's been even slightly lower than that. And that is relatively temporary as we adjust our inventories and lean our production down. And now when we go forward it can track closer to our sales curve here. So there is some unapplied overheads that are carrying from the third quarter lower production into the fourth quarter when that [actually sells].

[Flows] out of the [model].

[Flows] out of the slow -- the inventory turns.

But it is essentially a one-time issue. But what we don't want to do is to have and lose anyone's confidence in thinking, "Well, they did two consecutive quarters and it's back to the old days or something like that, where now they're going to slip and go sideways." That's not the case. In fact, I'm happy to say this, that in the month of August, we operated over 40% gross margin. And we operated better than the overall quarterly in even July, where we're 39.3. In September, we operated around 38, and that was because we only had 16 production days -- maybe it was 19 -- what were the numbers?

(Inaudible).

Nineteen sales days versus 23 and 22 in the other month. So that's what drew the quarter down. Had it not been for that, it's very likely that we would've reported 40% gross margin. So, anyway, I think that we have our business calibrated the right way. We have everybody working hard, everybody, I think, with their eye on the ball. And, again, our focus is to reduce our cost.

As we plan for '08, in terms of healthcare, I can say that probably for the first time in our company's history we'll actually get gross margin leverage off our healthcare cost. I won't go into the details of how we structured our plan, but simply to say that while everybody else's rates are going up 10 to 15%, we're actually going to see gross margin leverage from healthcare costs. And that's, I think, a significant issue for us, as well.

There are many, many other cost savings programs in terms of shipping, in terms of internal issues, night shifts. I could go on and on and on and on and talk to you about all the things that we're doing here that we'll continue on, that we have not seen all the benefit of yet. So I'm convinced that we're on the right path to that 150 basis points per year. And I think you can do the math. If you model it out at 150 off the base of this year and the SG&A leverage, you can see that Merit's going to be in a position to grow their earnings between 20 and 30% per year for the next three years, and I believe that the essence of it is is we'll double our earnings over the next years. That's our goal. That's what we're after. And we believe that we'll see significantly higher share prices based on that performance.

So, Kent, unless there's anything else that you'd like to add, then we'll go ahead and we'll open the time up now for any questions that you may have.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And our first question comes from Dave Turkaly, with SIG. Please go ahead.

Hi, David.

How are you?

Good. We're fine. Thank you.

Good.

Good to have you here.

Just to the guidance, and thanks for giving the explicit updates, for the fourth quarter, I know to get to the range that you're talking about, so the 8% for the year, we'd have to look at sort of a sequentially down kind of growth trajectory for some of the businesses. Is there any commentary you can give us about -- I know inflation devices earlier this year were a little weak, and then they came back. What should we be looking at in the fourth quarter to get to that $205 million, or are you guys trying to just kind of be conservative, given the quarter you just put up?

Well, I think, Dave, I think that just being out on the street looking at our business and everything else, I think it's still time to be conservative and make sure that we're not promising things that we can't deliver. We don't want to do that. So we think that 8% growth for the balance of the year looking at $205 million is where we think we're going to end.

If you take a look at earnings sequentially, we're at $0.38, I think, year to date, so that would imply a $0.14 earnings in the fourth quarter versus the $0.15 we did this quarter. However, at the end of the year, what's mostly affecting that is this gross margin issue that we talked about. It's almost a couple of cents, isn't it Kent, for just in the fourth quarter?

You mean the change --

Yes, change for the gross margin. It was about --

(Inaudible).

-- about, yes, so just that one-time issue was almost $0.02 a share or we'd be at $0.16. Then you also have the year end, where you don't apply the overhead, because we're going to be shut down between Christmas and New Year's and all that sort of thing. So that unapplied overhead is another issue that you have in that fourth quarter. And we've seen that, by the way, I think, historically. Kent, you want to comment?

Well, in regards to what you're saying on the fourth quarter growth rate, it will be a little slower based on that number. And it's (inaudible) due to the fact that we had a 19% increase a year ago. It was interesting how strong it was. So we had a little interesting comparable a year ago that makes (inaudible) that. But we're looking to sequentially growing a couple of million dollars and -- in the fourth quarter, and so the percentage is going to be a little lower (inaudible) for the year. But I think that is the prudent thing to do based on the way we see the sales flow and business going right now.

I think, yes, Dave, what we're trying to do, again, as we've said all along, that this is the transition year. But I think the costs are all in place and the products and the structure as we move into '08. Most of this stuff will be off the books in terms of the negative variances, or at least we'll structure it so that we make sure that our costs are balanced with our inventories and our sales. And we've taken -- listen, there's 250 less employees here today than there were in February. And that's a lot of cost that we've taken out of the business, along with the moves and other things.

So the fourth quarter is what it is. It's kind of catch up from the balance in these decisions we've made. We've done the right things. This is just a short-term medicine thing. And I wish it weren't that way, but it is. That's the way it's going to be. And then, so if we have those -- and I'm not saying you're one of them -- that doubt, then I suppose that they'll be very surprised when we get to the end of the first quarter, because everything's in place to have a magnificent 2008 and going forward.

Great. No, that's very helpful. One thing I hadn't talked about recently is kind of your international mix. Can you guys tell us what U.S. versus OUS was in the quarter, and just remind us kind of what's going on internationally for you guys?

Yes, I'll talk about our overall international sales were about 29%, and that's actually improving. You get a little bit of that from FX, but not a lot, because we have -- we're manufacturing in Europe, as well. And so we have to pay that in euros. We are focusing a lot more on international sales. We'll be going direct in two more countries next year. Last year we went direct, if you'll recall, in Denmark and Sweden. Those proved to be good decisions. We know for sure and have announced that we're going direct in Austria, and then we're finalizing one other place that we'll go forward there.

China and Russia continue to be, I think, the bright spots in terms of our growth internationally, and we have a number of other products that will have great international significance.

And while I'm on this subject, Dave, it's likely that sometime right after the first of the year that we will disclose publicly about our project that we've been operating over in Ireland that has come to the point where we'll start to talk about it. Now, we've been working on it for well over a year without any discussion. It is a significant growth driver, and we'll also disclose that probably right after the first of the year.

Great. One last one. I know you said 250 less people. What does that -- what was that off of a base of, and do you think there's still more to go, or do you feel like you've got the right kind of size staff now?

No, I think there's more to go. We had 1,776 or 1,785 are the numbers I recall in our staff meetings. The last time I checked, which was in our staff meeting last week, we had 1,525. One of the things that we are doing is that we've had a second shift in certain product lines. Part of that second shift is going to move, or all of it, essentially, is going to move down to our manufacturing -- contract manufacturer in Mexico during the first quarter. We believe that that's going to be a reduction of probably around 40 to 50 people. So I think when it's all said and done we'll be just slightly under 1,500 people.

And the other thing we've done, production is actually starting to pick up a little bit that we've noticed. So we've actually hired on the production line probably about six to eight people in the last 10 days. So we're hiring a little bit to fill in from some of the attrition, but I think the numbers are about flat in that area.

We're just starting to replace people. We haven't done that in a while.

Yes. But, I mean, all in all, I mean, our labor force is pretty stable. The turnover has dropped dramatically. And I think we're pleased. I'm really pleased with the staff and the (inaudible). But there's still more room to go.

And another thing -- if anything gets out of whack, I'll continue to bring down the staff to balance my inventories, my sales and my production. So I'll do and manage the business to whatever extent it takes to make sure that I have that balance in place going forward. But we don't think that just throwing people at an issue solves the problem. There are a lot of other ways to solve your problems in production.

No, thanks. It's very helpful. I'll let someone else [get in line].

Thank you.

Thank you, sir. And our next question comes from Ross Taylor, with C.L. King. Please go ahead.

Hi. I just wanted to go over your revenue forecast for 2008 again. I guess 8% initially strikes me as just being conservative, because I think at least on the cardiology procedure front you'd start to see some stabilization of angioplasty procedures in the June quarter, after we've anniversaried the COURAGE study. So I'm just wondering if you can explain a little more as to where your conservatism comes from for your revenue forecast.

Yes, well, you know, we've had two quarters in a row at 8% growth. We had the second quarter and the third quarter.

Fourth (inaudible).

And the fourth quarter could be even a little bit south of that. So it's difficult for me, and I don't think it's prudent even with these new products for us to go out and promise something and get those revenue numbers out in front of us. So we think now is the time that we have turned the corner in terms of our operational cost to be conservative, and, Ross, you know the story. It's under-promise and over-perform. So that's what we're trying to do is to set the standard at a level that we feel comfortable with and then go out and do everything we can to beat that number, but to base the numbers on something that we think actually we can hang our hat on. Again, these new products are going to add a lot to it.

But we're just not as -- we're just not as close to these stent procedures and some of those things that other companies are. I mean, there's still a lot of carnage, as you know. Several companies announced last week that they're still laying people off. I want to mention, and I think this is important for everybody to hear, too, we have not laid off anybody in our sales force and we have not laid off anybody in our R&D department. We continue to innovate, and we continue to, in fact, add selectively to our sales department, where others are doing something quite differently. But I want to stick at that 8 to 10% for '08. That's where I feel comfortable for now.

Okay. And I think you mentioned during your prepared remarks that you might have some new hemostasis valve products to accompany the All-Star. Did I understand you correctly?

No, what I said is this -- the All-Star, by the way, has launched in Europe. When I say launched, the supplies are arriving on Monday. We have already received orders for it. And the salespeople have their stuff and they'll be trained. We hope that before the end of the year it'll be approved in -- be approved by the FDA in the United States. It's been submitted. We've already had remarks from the FDA. And there's at least a chance that we may even get it sooner than the end of the year. But nevertheless, we believe that the All-Star is a significant issue.

What I did say is that we do have a new -- some new inflation device products, and I can say this, with all this conservatism and everything else, I will tell you the new inflation device product we have is a home run. Now, Merit, as you know, over the years has sold a lot of singles, and every once in a while we hit a double. But the new product that we have that will be introduced in '08 is an absolute home run. I have no doubt to it. And by that I mean $10 million, $20 million, $30 million in revenues. I have no doubt. Now, that will be introduced in the third quarter of '08. So we've got a ways to go before we reveal what it is, but it's dynamite.

Okay. And --

Along with, Ross, the other product, the other project that we believe also has the capability to produce $20 million to $30 million in revenues that we're producing in Ireland. So these things are -- there's two different products here.

Okay. And --

And they're both home runs, too.

-- no hints on Ireland until January?

I'm sorry?

No hints on Ireland until January?

No, we're going to wait until the year is done. It's not going to do us any good to talk about it now. But right after the first of the year we'll reveal what it is.

Okay. And last question, your forecast of improving margins by about 150 basis points annually, I assume that's going to come from the same forces that have been at work over the last few quarters, or is there going to be sort of change in the weighting as to where that improvement might come from?

No, I mean, I think it's going to come in labor costs, because of the efficiencies that we have. A lot of these are things like lean manufacturing flow, the simple things. In fact, I think what we've found out, which we already knew -- it's kind of interesting how we always have to kind of relearn these things -- but most of the improvements, Ross, come from simple things of flow, layout and paying attention. We've got a lot of automation this year. I would say out of the 250 folks or so that probably 50 of those have been issues of automation. We simply have brought those on. But those have just come on line. We really haven't had the benefits of any of that. They're online. They're working. But we'll get a full year's effect of that rather than just a couple of months.

I think the mix is going to be an important issue for us, so the kinds of products we're selling are higher, so we're going to have an issue with mix. And, let's see, so we've got labor -- and just some of the overhead. We've taken overhead out. So I think it's from the same areas, but the performance we're seeing now only has bits and pieces and only partial times, because they've only been in effect for like a month or two or this or that or three. Next year we're going to get the full effect of all of this thing hitting on all cylinders as we wipe out the variances from this quarter that flow through the model and then -- and roll. I [think] we're going to be on a roll the next several years.

Okay, good. That's helpful. Thanks.

Yes.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And our next is a follow-up from Dave Turkaly. Please go ahead.

You mentioned some of the acquisition opportunities you're looking at, and we've seen some stuff from Boston Sci and NAMIC, and I was wondering if you could even comment sort of on size. Is there anything out there that could be significant, or are you mainly kind of looking for tuck-in products to acquire?

Both. You know, we did look at and were working on a $100 million acquisition last year, and unfortunately it got away from us and we didn't get it. But it was something we -- would've fit very nice. Nevertheless, it didn't come our way. We've been very successful, as you know, Dave, with a lot of tuck-in products that are extensions of technologies and things that we may not have in our offering. And in fact if you look over the years, we've done eight or nine of those things, all of which, I am pleased to say, have been successful.

There are a couple of things, though, that I think are really interesting to us that have the potential. I'll just give you an example, and I'll dance around it a little bit. I was at TCT. With all the disruption in the marketplace, many of the companies that are the startup companies in which some of the larger guys have been taking either equity positions in or had some type of involvement have now backed away from them. I talked to no less than four companies in Washington this week who had some type of deal or another with one of the significant four or five players that, for all the reasons that we've talked about, either are not going to distribute the product or continue on in those areas. At least two of those, and maybe three, are areas or products that we think that are different, but they're not large revenues. In other words, they're just starting out and they're just (inaudible). But there are some significant ones in some of those products, at least -- all three of them, because I watched them all, were all being used at the TCT this year. So it's those kinds of issues, one other medium-sized opportunity and then about three roll-ins. So it's kind of a mixture of all of them. How's that for an --

That's -- no, that's very helpful. Thanks a lot.

They're coming in three areas. Probably, by the way, I have (inaudible) more opportunities than I've seen a lot, because the industry is consolidating and the big guys have kind of pulled the plug on a lot of these small companies that they took equity interest in or other types of financial interest.

Great. Well, good luck with that.

Thanks.

Thank you, sir. And our next question comes from Gabe Hoffman, with Accipiter. Please go ahead.

Hi. That's Accipiter. Thanks for taking the question.

You're welcome.

So just to understand when you're thinking about the year over year increase in gross margins for next year, that would equate to greater than 40% for the full year, correct?

If we take 38.3 to 38.6, depending on how it rolls up this year, we would add 150 basis points to that. So let's take the low part of that. If we did 38.3 -- let's just say it ends that way -- and added 150, that would put us at 39.8. And then we would pick up between 20 and 40 basis points on the SG&A line. So it would bring us right around 40% for the year.

Okay, great. And just to make sure that in terms of my math, when you're thinking about that 20 to 30% target for several years in terms of earnings per share growth, it didn't sound like you were assuming a substantial sort of pickup in revenues or in annual gross margin improvements, despite the product offerings forthcoming that you're very excited about.

Well, there are several other factors there, Gabe, too, that we've talked about. We've got a number of royalties that are rolling out. We also were able to pass a significant -- and were involved in the state of Utah with the research and development tax credit. So it's going to come from a lot of areas. It's going to come from taxes, a lower tax rate, effectively. It's going to come from product mix. It's going to come from about $700,000 or $800,000 worth of royalty fees that roll off, part of it this year, part of it next year. And then we just think it's the mix in itself.

So, again, we're -- when we talk about the opportunity going forward, it's still -- we're still looking out there two or three years, but the plans that we have in place both offshore, both in terms of the ability -- remember, we're only [sitting] here at 50% capacity, so as we grow our business and absorb those additional expenses we're going to have lower unit cost, so we're going to get the benefit of that. I think it's going to come from a lot of areas.

Sure. I guess what I mean is it didn't sound like you were assuming some sort of dramatic changes in things that are not under the Company's control -- external factors, things like whatever happens in the stent market or cardiac markets or things like that.

Well, you mean in those -- you mean in terms of those improving?

Right. Right. What I'm assuming is that sort of dramatic improvements happen in those --

No. No, we have not. You know, and I don't think it would prudent for us to do so.

Sure.

I mean, I think what we want to do is we -- here's what we think we can do. These are the improvements. And, I mean, I don't want to sound rude or anything, but I think -- I've always thought that premium companies were those that could take and leverage that top line. I mean, if we can grow 8 to 10% and grow those earnings between 20 and 30% the next three years, I think there's going to be a lot of happy people, and I'm going to be one of them, because I think that's significant, Gabe.

Agreed. And so are we. And thank you for all the hard work. We appreciate it. And it's comforting to know that you're only thinking about kind of 8 to 10% revenue growth to get there. That's very comforting.

Yes. We're not trying to say that we have to do this and have some numbers and things go against us and then we have excuses. That's what we're going to do.

I think, Gabe, that it's important that -- to get to 150, we're going to need to see the 8 or 10% growth. Part of that, as Fred's already said, is going to be higher unit production. And it's going to be improving production in some of the products that are new, that are just getting traction. So that is part of it. But it's not -- we're not expecting it or needing it to be excessively high. There is an upside, too. [That] some of these products actually take off better, then there's an upside to the -- both the sales and then the margins, as well.

Understood. Great. Thanks.

Thanks, Gabe.

Thank you, sir.

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And, sir, there appear to be no further questions at this time. Please continue with any additional comments.

Let me just go ahead and make a closing statement, and, again, we appreciate your interest. Just as a point of interest, we will be presenting at the CIBC Conference, I think on the 5th. We'll also be presenting later on in November at the Stephens Growth Conference in New York, as well. And we'll be meeting with a number of institutional accounts while we're there.

I think we've done what we said we were going to do. We said we would bring the cost down. This staff has worked very, very, very hard in difficult market conditions. And I think that's significant. While others have been losing market share and have really had to struggle and reorganize, we were well in front of it, and we're positioned to take advantage. Because of our structure and the hard work, we're positioned to take advantage.

As I mentioned earlier, we've not made cuts in research and development. We've not made cuts in our sales force. We're doing quite the opposite. We're keeping those expenses in control and being wise, and if we see that those -- that these opportunities or the market firms up, then we'll go ahead to move and put more resources in those areas. So we're going to keep a very close eye on the business.

But what we are going to do is to deliver. The staff knows that. They know it's expected. And what we're going to do is over the next three years we're going to double our earnings. That's the net of it, and that's our horizon. Three years, we'll double our earnings. We'll grow our business 8 to 10%. And so what we think is these are all attainable. There is, I think, a substantial amount of upside. But we're not going to promise something we don't know.

But what we do know is this. We know what those growth rates are. We know what those opportunities are that we can control. And our cost structure is in place to leverage this up and to return to our shareholders, we think, significant improvements in earnings as we go forward, [although now] that's going to mean we're going to have a higher stock price.

So we believe we have the right plan. We have no debt. We can take advantage of a lot of opportunities. And I think we're poised for three very, very exciting years looking forward.

So we thank you again for your interest. We look forward to talking to some of you when we come back. Kent and I will be available here for the next hour or so if there are any follow-up questions that we can go through. Again, we thank you for your interest, and we'll go ahead and sign off now from Salt Lake City. Thank you very much, and good evening.

Thank you very much, sir.

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for participating. You may now disconnect.