Merit Medical Systems Inc (MMSI) 2008 Q3 法說會逐字稿

Good evening, ladies and gentlemen, thank you for standing by. Welcome to the Merit Medical Third Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS) I would like to turn the conference over to Mr. Fred Lampropoulos, CEO of Merit Medical. Please go ahead.

Good afternoon, ladies and gentlemen. We are delighted to be with you. We are broadcasting from Salt Lake City. With us today we have our operating officers and members of our staff and we appreciate your attendance. Before we get started, we would like to turn just a moment over to our General Counsel, Rochelle Perry. Rochelle?

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 SEC, which are 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 such statements.

Thank you, Rochelle. Ladies and gentlemen, we're delighted to report the results of our third quarter. In this press release, which is somewhat lengthy, we also offer an update about the outcome and status of our Angleton, Texas facility. Let's start out with the performance of the Company in the third quarter.

As some of you will recall, historically we guide down, both in terms of earnings and revenues in the third quarter. We were pleased and I don't want to say surprised, but very pleased and I guess surprised is a fair word, that our revenues hit a record $58.2 million in the third quarter, up 15%. Now you'll recall in the first quarter of this year we were up 5.0%, in the second quarter 10% and in the third quarter 15%, bringing us to an overall effective 10% for the year now and we are pleased with that.

We're also pleased that our net income was $5.2 million, up 18% and that was to $0.18 a share, which I believe was at the consensus level, compared to $4.3 million last year. As we look at the year and I think these are the things that we as a business try to concentrate on, although we're aware that many of you look at quarters and look at the progress of the business. So I think it's important to note that our earnings are up over 40% from last year.

Now in this period we also took a charge of approximately $0.02 after tax for expenses associated with Hurricane Ike and about a $300,000 charge for an impairment charge for the discontinuation of a product line. Had we not done that, of course then the earnings would have been at $0.20. But all in all, I think we're very, very pleased with the overall performance of the Company in a time when we spent a lot of time worrying about and trying to get our facility up in Angleton, where there was a lot of attention diverted to that.

Briefly on the Angleton issue, we had, I'm going to say minor-to-moderate damage, as we made the assessment. We had some glass, we had some wind damage in which part of the roof was pulled back, we had water damage and just in a matter of a few days. In fact, we were on the ground in just a few days after that.

Houston was a mess. It was difficult to get in there. But I'm very pleased that within a few days we have three 53-foot tractor trailers heading down there with supplies and supplies were not available in the general area. And the net of the whole thing is this. We were up and operating partially within a few days or a week or so and we are now back into full production with all the repairs made.

And to give you a little of idea of the extent of the work, we had to pull up 18 inches of all the wallboard and cut it out and replace it in the entire facility because of water damage, even though there was only an inch or two, but because of mold and that sort of thing it had to re-certify the facility. None of our employees were harmed. There was a lot of, of course, time and attention that they had to spend on their own circumstances. We had some people that were without power for as long as three weeks.

But all in all, I thought we handled it well. In fact, the insurance company came to us and said, "If everybody else did it the way you guys did it our claims would be about half". In fact, at one point, they said to us, "I hope you guys have pictures, because most people are still standing around looking at this stuff. We need to make sure that you have pictures to support the damage that took place." They didn't get there until the third week and we were able to support that.

There is some insurance coverage. There is some stuff, but this will have to be gone through a process of being adjudicated and then we will look at how this all shakes out in terms of any loss of business or business continuation. We are insured to those effects. We do have a deductible, but we thought it was appropriate that we take this charge based on the expenses that we had and then there could be some adjustments relative to insurance down the road.

So, Kent, do want to add something on that?

Yes. I think the one thing that was very important is the critical assets of our inventories were preserved, both by our preparation as well as the fact that that one part of the building wasn't damaged. And the second part is all the critical equipment was protected and unhurt and so that enabled us to get up on that quicker.

Finally, I think that the insurance, we've accrued for everything that we believe would be paid by the Company up to our deductibles and so even though the exact amount isn't known, basically the majority of expenses, we believe, are covered by insurance.

Talk just briefly about gross margins for a second and I'll turn some time over to Kent for further clarification and then I'm going to talk about revenues and our business.

The gross margins for the third quarter were improved over a year-ago period, but, as you can all see, they were down sequentially from the second quarter. Some of the purpose of that was that we got -- we had a lot of expenses that got caught up in terms of the commodity prices. Oil, shipping, both incoming and outgoing, and all of these things hit in that period. Now, of course, on the positive side of that, we've already seen dramatic decreases in terms of surcharges on these very same expenses that we got hit for in those quarters and those will be reducing, assuming that we stay at these same levels. But we're seeing that trend and we'll get the benefit of that.

We've also gone back to many of our vendors where almost everybody took advantage, including Merit, to go out and try to pass on some costs. Merit is doing that, others. We've actually gone back to some and are meeting weekly to take a look at those and actually asked some vendors to roll back those prices to make sure that we're not being taken advantage of.

In our case, because we try to do things correctly, we have had increases in labor, which we've discussed about in the second quarter. We'll have some insurance increases and some of those factors that are going on and so we're passing on up to 5.0%. But I think, when its all said and done, it'll be somewhere around 1.0 or 2.0% of sales is where we'll end up, in terms of our overall revenue increases, is probably where we'll end up. So there'll be some offsetting stuff as we move forward in balance of this year into next year.

So we also had a number of products that we launched during the quarter and they were the costs associated with the startup of new products. We're not changing anything in terms of our forecast. Our gross margins, at this point, where we believe that from what we can see today and looking forward, that Merit is going to see robust sales going forward, double-digit sales as we look forward to 2009.

Let me give you the support for that. We have launched several new products, all premium products and all are being very, very well-received. In fact, I can tell you that from several physicians, particularly on products like the M.A.K.-NV that doctors have told us that when they compare our products against the competition that these are so far superior that in some cases they're not even waiting to use up their inventory. They're actually buying these products today.

These are products that sell for $90 and have 65% gross margins or 70%, but have features and benefits that are so far superior that we believe that there are some huge product opportunities and hits that we're going to have. They're going to be moved beyond what I'll call the singles and maybe into the double range and so we're going to extend some of these hits into extra bases.

Kent, do you want to add anything on the side of the gross margin discussion?

Yes, I appreciate that. One of the things that I think also affected this quarter is the product mix. We've had an increase in sales, in particularly in our kits and trays, compared to the earlier quarters of this year. And so when you look at it sequentially, we've had a 23% increase in kits and so that is in part because of, I think, in growing business in a time we thought that the summer might slow down. It actually increased sequentially.

And beyond that, we have, on a comparable standpoint, we had -- we've mentioned this is in other calls in the past two quarters, but we had a large amount of sales that went to an OEM customer in the kit area early in the year that dropped off, in '07. So now the comparable in the third quarter does not have that business and its going to help make that difference.

Yes. I think --.

Because of that, because of the mix change in the margins, that percentage.

Yes. So let me just make sure I clarify that. In the second quarter of last year, we had that OEM customer in the third -- which was in the kit area. That fell off in the third quarter of last year.

Yes. In the third quarter of '07, correct.

And so this year the new business on top of that gives us a little bit of a need to have this clarification so that it doesn't look like we're spending time on these lower margin things, but its more of the numbers moving.

On the other hand, I think part of the weakness of some of our competitors have flown through. They're delayed somewhat and we're seeing the response of the market to I think a superior product and customer service level that can provide.

Yes and as you all know, we've discussed this before, we have essentially three competitors on our kit line and all three of those competitors have situations where their businesses are being challenged, they're being sold, or other circumstances going on.

And I'll give you an example of one of those. We had an account this morning with one of the these competitors that's 500 kits a month. That is about $135,000 worth of business and the account just said they had had it with them.

We matched their price. We didn't have to go lower. We matched their price, we got the business. And one of the things that the kit business does do is once you get in there, you're able to draw through a lot of other business, as you add on, as you develop that relationship. So we're seeing a lot of that.

We're not focusing on kits and trays, but we are seeing some of the fallout of some of these weaker competitors. We do incentivize our salesforce to sell these premium products. In fact, in order to qualify for Merit's President's Club you have to hit the focus product, which were some of the newer products and the higher margin products.

So I think, all in all, we're happy with the business. We're glad that Hurricane Ike is gone and past and that we've come through that, I think, again, relatively unscathed. Some costs and some delays for products, but we'll be all caught up. The staff down there has done an excellent job, as well as the staff here in Salt Lake. We've had engineers on assignment down there and all in all, I think we just did an incredible job and I want to commend the staff here, the staff in Angleton, as well in Ireland, who helped support all this. So we, I think, have done well.

Merit continues to be debt-free and I will tell you, as you all know, in this environment that is a wonderful position to be in. Our cash balance at the end of the quarter was, let's see, over $30 million and it continues to grow. And so we're in a very good position with that cash and with an un-drawn revolver, which is 2.5% below prime, to allow us to take advantage of opportunities, to which we are seeing more than we have ever seen.

With the capital markets kind of shut down, venture capital, all the various issues that we're all very well aware of, we are seeing more deals. In fact, we're visiting two opportunities next week and we've talked about two or three this last week that we're working on, so that we hope that in the future we'll be able to announce opportunities and products which we think will help Merit going forward. Some new technologies, patented technologies, there's a number of great opportunities out there and Merit's in a great position to take advantage of these.

So, all in all, in our business, revenues are great. We have plans that continue for cost reductions. We will be looking in the future to take more products offshore. We have great new products coming forward. We have a full pipeline of products.

And the staff, I want to extend my appreciation to all of you for your hard work. It's a difficult time and a lot of lives are being affected around us. We see it. Our unemployment rate and our ability to attract labor and those sorts of things has improved dramatically as the economic times we seem to prosper, so to speak, in these difficult times in terms of more stabile labor markets and turnover. So we're in pretty good shape there.

Going forward, and I think this is the big news, I think the important thing is that our growth continues to accelerate and our goal is not just to be in double-digits. As you know, earlier in the year we had talked about 8.0%, based our budgets on that. Things started moving. We're into that double-digits through the first nine months of the year.

I think it will move into the low double-digits and we are in the process, now, of calling for forecasts and budgets for next year. But the momentum that I'm seeing, the opportunities, even with a weaker dollar and with these other situations, we're still seeing that there's a lot of momentum in our marketplace.

So I think that pretty well covers how we're doing, what we've been through. I think that brings us up to date in terms of Ike and that sort of thing. Kent, do you want to add anything else before we turn the time over?

Yes. Thank you. There's a few financial highlights I wanted to focus on. One is the classification of these expenses went into selling and general, administrative so that, if you look at those expenses, they'll appear to be high. The $832,000 had to go there, so if you look at those unusual expenses coming out, then our percentages are about 23% for both the quarter and the year, which is in line with last year and with our historical history and what I think many of the expectations were in that area.

Another thing I'll mention, I think, is that our business is growing. As Fred said, we were over $31 million in cash. Our working capital is now grown to $77 million and it's a 4-to-1 ratio, which I think is a strong thing in an age when, that it's so tight.

Another advantage I'd like to point out is our EBITDA has grown dramatically. We're now at over $41 million in EBITDA, when you look at the growing total amounts have just been dramatic increases in the last few couple quarters.

Yes. So the business came through the third quarter, in summary, at record levels. Even though we generally guide down, because that's what we've seen over the years, we saw a dramatic increase in sales. We have a lot of momentum, a lot of great products, a lot of good opportunities and the Company is as healthy and strong as its ever been and so we're in great shape to take advantage of opportunities and markets. We have a great staff.

And I think that's probably enough of talking about how wonderful we are. So now we'll turn the time over to you guys and we'll let you go ahead and poke at us a little bit.

(OPERATOR INSTRUCTIONS) Our first question comes from Shawn Fitz with Stephen's, Inc. Please go ahead.

Hey Fred and Kent, good afternoon. Congratulations on a good quarter in a tough environment.

Thanks, Shawn.

Hey, just as we dig a little bit into each of the revenue segments, Fred and Kent, you provided some details in terms of some of your kit business. I guess, as I look at some of the other revenue segments, in particular catheters was very strong. Could you provide some more insight into what was driving that in terms of dynamics in the marketplace or specifically what you all are doing there?

Yes. Go ahead, Kent. I'll let you just --.

Yes. I mean, we've had a lot of growth in there. Some of those focus products Fred was referring to are in that area, so you see growth in the Prelude, the introducer sheaths, you see it in the Impress, which is a radiology catheter, and drainage catheters are really growing in a high percentage rate. Many of these are newer products, so they, of course, they're in the introductory phases of their lifecycles.

But so you see both product introductions and focus of the salesforce driving that, as well as the opportunities for new markets that we're entering into and some more of the new products that we introduced this quarter go in there too. We haven't talked about that, though.

Yes. Shawn, let me just kind of go into the sheath business, because this is an interesting one. One of the things that Merit has done over the last couple of quarters is introduce a radial artery sheath and a market (inaudible - background noise) sheath.

And a radial artery sheath is a product that is used for patients, which makes them more ambulatory, lower time with smaller catheters and we get two to four times the price for that product than we do for a standard sheath. That's particularly being helped over in Europe, where they do much more in terms of procedures than we do here in the United States. But it's a growing trend that I think that we'll see here in the U.S. So that's part of what's driving it.

The marker tip, the new M.A.K.-NV is in this group as well and all of the access products, the M.A.K. products and all of these things. So this is an area that you're going to continue to see growth very dramatically. In fact, even though this one, I think, for the quarter was at 26.9% for the quarter and for the year, I think we're still at about 19%.

It's going to probably approach someplace, even on a higher number, close to 30%. And remember, we're taking this market share from existing products, but these were improvements where many of our large competitors have just ignored these markets for years and years. So we're excited about the opportunity in those particular areas.

So I'm talking too much, Shawn, so I'll let you go ahead. I hope that answered at least part of the question.

No, perfect, perfect. I guess, and then, Fred, just maybe take a step back. I know we're, to some extent, in kind of uncharted waters, but you've obviously had a long career in this industry. Could you maybe just previous some perspective on what we should be thinking in terms of overall PCI procedures in this environment and kind of what you're seeing and what you're hearing in terms of your intel on the Street right now?

Our numbers would indicate that at least for Merit our business in the inflation device for the third quarter grew at about 4.3%, so it actually slowed down over the second quarter, which is what we would expect in the summer quarter. But the whole PCI area is still, I think, suspect. I think it may very well have bottomed out as we have indicated and reported before but we're not seeing huge upside to that.

Where we are seeing Merit's opportunities is really over in the peripheral business, the interventional radiology side of the things, which is where we continue to invest in new products and those things. So we see those procedures continuing to grow across the board. So PCI? Still probably bottomed or at least slowed down on the downside. Our overall business is up, but remember we have some of that spine therapy product in here that helps in this business.

I would suspect, based on that inflation device business, when we back out that business, that you're going to see the thing down, probably, Kent? Or slightly flat or where are we?

It's 2.3% up, any way.

Okay, 2.3% up. So that's bottomed. But I think you'll see in these other companies, the bigger companies that are selling the stents, that there's not a huge upturn in that area at all.

Okay. Kent, just kind of a housekeeping item. Could you refresh my recollection on what you all said in the second quarter as it relates to guidance for the full year 2008?

We didn't really change that. We're still on the 8.0 to 10% on the topline and obviously we're pushing up towards the top end of the range at this point, particularly with this third quarter as it was and we just adjust the bottom line for what we did in the second quarter, so.

Okay and I guess my math is right here, doing it quickly. To stay within kind of that upper end growth year-over-year and your product revenues, the quarter would have to be just up modestly over the third quarter. Is that kind of -- are we in the right range there?

Yes. That's what it would be to reach that goal and that's what our internal projections were as far as that and so we aren't changing that, at this point. We may -- we have some upside, is what I think.

Okay and then last question. Fred, you talk a little bit about business development opportunities. Could you just maybe speak to some more specifics as it relates to strategic fit, what you're looking for, kind of range of sizes and that type of information?

Well, that's a really good question. We have the capability in normal markets and with reasonable companies to, I think, borrow up to $200 million. In these market times and in these conditions, most of those opportunities have proprietary well dried up, but we all know that. If you talk to any of the banks, these things spread to us as well.

What we are seeing, however, are a number of opportunities where we have inventors coming to us with good products that we think have good market opportunities that they haven't gone to before. We've become kind of the company of choice for a couple of reasons.

Number one, we meet with them right away and we can make a decision. It doesn't have to go through several levels. I meet with them. My R&D and stuff like that and we will, in the very near future, announce a couple of smaller deals for product development, which will go out -- they have to be developed. But they're products that we're very excited about and they'll be in the '09 area and we'll start to talk about that as we talk about next year.

Now, on the larger side, when I say larger, this is in the new environment we're in, we're seeing a number of companies and opportunities that could be in the $15 to $50 million range that we think could be accretive, that we think add technology and also that we think are complimentary to Merit's existing products. And we are talking to no less than four different opportunities there. No less than that, actively engaged in dialog and due diligence.

Now, how many of them will happen? We talk about this all the time. I think there's a higher probability that these things will happen in this environment than they might have in the past, because there aren't that many qualified buyers. We can pay cash. We still have a very good currency that's up for the year and so we're in very, very good shape and the best I've ever seen in terms of these opportunities.

I think what we have to do is make sure we keep our senses about us, that we're making the right choices and not trying to do it impress anybody, because I don't think we need to. I think our Company's growing nicely. It's profitable. We don't want to derail that, but at the same time there are some really good opportunities out there that we may not have seen a year ago.

Okay. Fred, great, Kent thanks for the time.

Thanks, Shawn.

Thank you.

Sean Bevick, SIG

Hey guys, how are you?

We're great, thanks.

A few quick questions. The tax rate for the fourth quarter, what is that going to be now with the -- I mean, do you have an estimate for that, being that you're going to get that R&D tax credit now?

Yes, I'm going to go ahead and turn that over to Greg Barnett to talk about effective tax rates. Greg, do you want to answer that? Greg's our Chief Accounting Officer.

Yes. Well, probably, I would think we've got the R&D tax credit that we're going to get a benefit for in the fourth quarter, with the reinstatement of that. It will a couple hundred thousand. So we probably could be in the 35 to 36% range, eventually, so.

35 to 36% for the fourth quarter?

And then another thing that, just as a point on the tax side is that Merit was instrumental with the efforts of Greg Fredde, in terms of the R&D tax credit in the State of Utah and I think this year, Greg, that would be around $25,000? So its actually higher than the federal and going forward next year we would expect that to actually increase. So I think we like those things and we use them and reinvest those funds to bring out new products and create jobs.

Okay. How much was the FX impact in the quarter?

For revenues it was about 0.9%. It wasn't even quite a full percent on revenues. For the year it's about 1.2%.

For margins, it's naturally a hedge, just because we have a manufacturing operation in Ireland and so the costs of those operations make that gross margin affect about half of that.

Yes and so that's really, I think, a very important thing, is that we do have that benefit of having that natural hedge in place, because as that goes down we pay it in Euros, it's translated into dollars and it reduces our cost on the labor side. So our labor costs have come down probably around 25% and when they're translated, from 160 as an example (inaudible - multiple speakers).

Yes, the margins we don't have a lot of effect from FX, because with the discussion of the rise in revenue, costs go up similar so the margin effect, I think, actually for the quarter was only like point tenth of one percent.

The good news is, to answer the question, is as Merit is in very good shape and with the dollar strengthened it doesn't really hurt us like it might other companies that don't have those operations.

Okay. You guys provided gross margin guidance before, didn't you?

We did.

What was that for the year?

You'll recall that we set a program out with goals off the base year, last year, of 38.4% to grow our margins, 150 basis points over the next three years. We clearly exceeded that this year and we're in front of that and we elevated our gross margins for our goal this year to be at 41.5%, which would bring it, at that goal, almost 310 basis points above last year.

Okay and just two more quick ones. The assets you got from MEND, where are you guys classifying those revenues or what other kind of new acquisition revenues do you have?

I'm going to let Greg do the -- talk about the assets. It's not fully completed.

(Inaudible - multiple speakers and background noise) acquisition he's talking about.

Yes, Micrus, yes that's MEND, yes.

The Micrus is just going to be in the -- I think it's in the catheter sales, so.

So that's where the revenue will go, is in the catheter sales. We're transferred the technology from their facility to our facility. There are three different projects there and one of those is delayed because of the hurricane by about 30 to 45 days, I would think, in terms of that transfer. But effectively our goal was is to have it done by the end of the year. I actually think we may still hit that. So the revenues are in catheters and its classified on the balance sheet bought in Goodwill and Intangible Assets and Intellectual Property, which are the Tangible Assets.

It's not very material yet to our total revenues, though, to give you a feel for that. It's not a big add in and so we're just starting that product up. It's actually ahead of what we expected to be and we're running into capacity constraints at the moment, but we'll be able to resolve those ourselves when we get that production going up on our own. But anyway, it's a pretty small percentage for OA, if not (inaudible - background noise).

Okay and then last one on the commodity costs. Do you guys see any lags on that or when the prices are high in a particular quarter that's when we're going to see the costs hit? Or are we going to see --?

Well, yes, you're going to see -- I mean, for instance, I'll give us the one of Platinum. As you all know, on Platinum, Merit sells a lot of marker band catheters that have Platinum tips on them or Platinum bands and as those prices were going up, we buy those. We produce those. They go into inventory and they have to be sold. So, you see it as its going up in there and you still have some of that expense of inventory that's on the shelf. Most of that will be gone and then we'll replace it with a lower cost. So yes, there are some lags to that. Kent?

Yes. In fact, our resin material, some of them have gone up as high as 38% and a lot of those recent increases just hit us in September, some were behind that. So it does lag, as you said, and I expect that one, the pressure for more increases are going to be off and we're pushing that they should go back down and when we can roll that inventory through their system and then through ours.

So we can see, maybe, another quarter or two of higher costs from this even though oil prices have dropped over 50% in the last (inaudible - multiple speakers)?

Yes. You're going to see some lag coming.

Okay.

Its just it comes in, it has to be billed, it goes on the shelf and it has to be sold before you recognize it, but your costs are built in there.

Yes.

Yes.

Okay. Thanks, guys.

You bet.

Christopher Warren, Caris & Co.

Hi guys. Wanted to ask a question about what exactly was discontinued and what kind of revenue that line generated.

Oh Chris, you always hurt me. Now, yes, it was a Viceroy, which was an inflation device. It was an analog device that we developed for use in peripheral urology and esophageal and what we did is we were generating a lot of revenues off of it, minimal amounts of revenues. But the product's only been on the market for a year, less than a year, maybe a year and a half. But our guys are pretty aggressive. We call them the "Impairment Brothers" out here and if it's not generating revenues we don't keep it on there and carry dead assets. So the assets are here, but it wasn't generating the revenue that was necessary to defend it and so we took the charge.

Yes. Probably in the prior years about $25,000 in sales numbers.

Yes.

Okay.

Yes. I mean, it wasn't much and now we still own the tooling. We may be able to sell it off to somebody that -- but, anyway, the bottom line is it wasn't getting the focus that we also expected, because of all these other new products. And as you know, Merit already has inflation devices. By the way, I made the decision to develop the product. I take the responsibly for it. You got me.

No, not --.

It's not a big deal. I mean, its -- but, I think the important thing is, as we know in this environment, a lot of people take assets and they keep them on those books and they do lots of things and they wait a long, long time before people find. We don't do that out here. If it's not generating revenues and we can't defend it, we take it and we write it off.

Got you. Just turning to some of the new products and good stuff there, could you give us an update on Slipknot? I mean, is it in the market? How's it doing if it is?

The Slipknot has just been launched. In fact, Chris, one of the things I'll do is I'm going to send you an email that I got today from a physician that used it on a patient today where they used three of them on one case, on a de-clot. It's -- the doctor's comments are, "It works great, the staff loves it, the nurse loved it. Thank you for developing the product". We think that it, again, is just starting. We've done the training, but we also think that what will really help this is Merit just announced, as you saw earlier in the week, that we received FDA approval for our Short Sheath.

This Short Sheath is the very same product that's used in this very same procedure and we have a tremendous amount of demand. In fact, I think as we're looking forward to next year, because this is also in the catheter area, we have an existing product line in that area that we're replacing with this product that has new and improved features. And I think that product line, in terms of its revenues, is probably going to double or triple next year and it goes right along with the Slipknot. So that product will release on the 1st of November and be on -- it's on the shelves. It'll come out and be distributed worldwide on the 1st of November.

I also pointed out in my press release that in the past we had an outside vendor that made it for us, but we can only sell it in the United States and Canada, because we didn't have the CE Mark. In this case, it is CE Marked. It's available for worldwide sale and our margins almost double the new product, which is improved. So we're very excited about that and you'll be hearing a lot about that in all the calls going forward.

Got you. Thanks for that. And just touching on the kit and tray business, as we look forward, should we expect another couple of almost distortions in the large magnitude of year-on-year growth stemming from that year-ago easy comp?

I don't know.

Yes, there should be some of that, I think. It'll show a ping in the fourth quarter and then it'll start diluting a little bit, but I don't know. Again, it's above what we've forecasted and its not a focus area. But you know it depends on the competitive environment and how that continues.

And the focus of our salesforce. So the answer is that other product is out, as compared to last year, and it wasn't until sometime around June when we started the product that replaced that, which, by the way, has done tremendously well. And that's our Transfer Set, our Swabable Transfer Set, which has done very, very well at like 60% gross margin. So that's what we replaced it with, but I think the comparable quarters you'll probably get maybe one more quarter of the comparison.

Then, on the other side of the coin, that product started slipping up -- not slipping up. It started moving up very dramatically and then you'll probably see, oh, maybe a quarter. I wouldn't think much more than that. Maybe two, but not much more than that.

Okay.

Ten points out. It's like this call I got this morning. Our competitors are continuing to get weaker. Weaker and weaker.

Got you.

And so, what happens, our sales guys are out there and they want to use Merit products. So we have to manage this demand.

We take the orders.

Yes. I mean, its -- when the sales guy's out there, they want to buy your product and you can convert it on the spot and that's what happened this morning. The guy just said, "We can't do this anymore. We don't like the quality. Can we do, we'd like to do this with you guys. Will you match it?"

We looked at the pricing. It wasn't tremendously high margins on the whole thing, but there's a strategic reason. Because whenever Merit's in a lab, the other advantage we have over our competitor is we have all of these products and once we get something in there and get our so-called -- I hate to -- maybe I shouldn't -- I'm going to say it anyway. Once we get our claws into them they buy a lot of stuff.

And so that's where you get the standalone stuff. That's where you get catheters. That's where you get inflation devices. So if it's out there and helps to build the business strategically and positions Merit and strengthens us, then we're going to go ahead and look at that business and continue to take advantage of the opportunities.

Sure. Is it fair to say that the growth in the quarter is really more reflective of that just sort of competitive strength than specific contributions from either certainly Slipknot, but also the M.A.K.-NV and the short sheath?

Yes, yes, yes.

Fourth quarter.

Now, remember these M.A.K.-NV and short sheaths and those things are really going to really be fourth quarter. So those things are not driving growth at this point. Those are just getting launched and being shown and samples and training and that stuff. So, no, any of the things that you saw in the growth are really from legacy products and the strengths of Merit in the marketplace, not the newer products. But there's a few of them that have helped us.

Yes. There's some from '07 and '08 that are contributing.

Yes. I mean, the Prelude --.

Yes.

--the marker band and the radial kits are having probably the biggest effect and those would, I guess, be called legacy products because we've had the Prelude out for three years. But these products have only been introduced in the last six or nine months, but they are really getting traction and then the M.A.K. kits and those kinds of things, Access. So it's kind of the product that we've introduced over the last couple of years that are giving us the strength.

But I think what you will see going forward is now these other ones will start to kick in and they're all at those same points of sale and that's why, as I've said both in conferences and other places, that's its apparent to me across the board that Merit's growth on higher numbers is going to accelerate. That's what we believe and we see, I mean, clearly there's empirical data to support that.

Understood and just, I promise, two more questions.

Okay.

Any update on the sort of secret weapon technology that you acquired from Japan and on R&D, should we be thinking close to $3.0 million a quarter or $2.0 million a quarter for the next three to six months?

You're not going to see anything for the next six months, because we have not filed our 510(k) yet. It's one of those things with a project. I will say this. I believe it's a $30 million annual opportunity five years out. I think that in '09 we'll introduce the product.

We'll also introduce several others that we haven't talked a lot about. But you're not going to see a whole lot of -- you're not going to see any contribution for the first half of '09, as we get out there and sample and do the things we need to do. So we're not including that in this accelerated growth at all.

On the R&D question, it'll be much closer to $2.0 million. It's not going to grow significantly or it might slightly decline as a percentage of sales, but it's standing. We've got a pipeline of products and resources and we're bringing those through, so we're not talking about adding a lot of R&D. (Inaudible) is to get these products out with the existing resources that we (inaudible) or less.

Okay, perfect and nicely done, guys. Thanks for taking the questions.

Thanks, Chris.

[Jason Binford], Raymond James

Thank you and good afternoon, guys.

Hi Jason.

A couple quick questions for you. Just, Fred, you mentioned a couple times growth continues to accelerate and I'm just wondering are you suggesting that growth will be north of 15% in the quarter?

No. No, no, no, no, no.

Okay.

No. I'm really talking about the nine months. If you'll recall, last year we did 8.0%. we're 10% this year. We haven't done the forecast yet, but if I were to give a gut thing today I would say that our growth will be in the mid-teens.

When I say mid, lower teens, so 12%, 13%., that's what I think we'll do, but we'll confirm that. You could push up to 15%, I suppose, on the very high side, but that's not what I'm saying. That would be -- we wouldn't guide there. We'll guide probably at 10 to 12%, 11 to 13% and then we'll see how things work out. But if you want to ask the question, let me phrase the question. Is Merit capable of doing 15% next year? And the answer is absolutely.

And kind of the big drivers of that growth? Is it largely kind of the share gains and then modest contribution from new products ex the secret weapon?

That's correct.

Okay.

By the way, we have more than one secret weapon out here too.

All right.

And we'd need a nice market as far as procedure growth rate. It would have to not wane on us. It'd have to be strong (inaudible - background noise).

Well and I think vision is, as you know, in our business and in these times, I'm not going to say we're recessionary-proof because that implies a lot of things. But we're not seeing lowering demand; in fact, to the contrary for our products. And our strategy also we've invested heavily in staffing our OEM sales. We're hiring a guy in Europe. We have the United States fully staffed. We've never had that in the past. That's driving a lot of stuff.

So, I mean, I just think across the board its just a lot of opportunity, both in legacy and new products, but we're in a great business at a great time and I think if you take a look at the financial conditions you can see it. Where else are you going to find a business that, in a prolonged -- I believe that this isn't just a one or two-quarter thing that some people say. This is, I believe, going to be an extraordinary time -- I'm sounding like an economist now -- that none of us have ever known in our lifetimes. What better business could you be in this one? We're in the right business at the right time and now we're going to get a lot of attention, because in the past, as you know, there are a lot of these things that get hot and they come and go. And we're just kind of Steady-Eddie, but Steady-Eddie is kind of picking up some steam.

Sure. Well, sounds good. In terms of the gross margin, I understand the mix impact with the custom kits, but higher material costs, freight labor, new product start up -- which one of those factors impacted you guys the most? And I guess just in terms of the new product startup, is there any kind of one-time costs associated with that?

Kent?

Yes. The labor costs when we were going through the mix of those was probably the highest of those components you just named. That we had a [hidden] raise we gave in April that really affected this quarter more than of course even the second quarter by the time it rolls through your inventory.

Okay.

And your standard costs exchanges.

And Jason, just to go back, you'll recall that, as we moved in the second quarter in this country, we saw these record oil prices and commodity prices that were hurting our employees and we were still operating out here in Utah where most of our manufacturing is done at somewhere around a 2.5 or 2.75 unemployment rate. And so we felt compelled to make sure that we secured our workforce. It was the right thing to do for our employees and for the business because of the slowdown and turnover that we see now.

On the other side of that coin, we're seeing more and more layoffs. We're seeing more and more of the kinds of issues here in Utah as we've seen in the rest of the country, although it's slower. We never really go up on the high side or down the low side, but we have seen a tremendous amount of easing of labor pressure.

So what it means going forward is that we're not going to have the pressures of higher labor costs going forward that you might normally see. So we're not -- I don't intend, nor do I see in the cards, that we would see any major increases in labor costs as we go forward next year, other than some of the costs that you might see for healthcare and we're looking at how we'll divvy that up as those costs come in, but we should not see any increases in labor cost.

In fact, we'll see lower turnover costs and that's always -- maybe the higher cost is the turnover and we're not seeing that at all. Then we'll see lower labor costs overseas where we also have a lot of products being produced in Ireland because of the strength of the dollar.

Okay. And just looking at your gross margin guidance that I think you mentioned and you kind of reiterated, that seems to imply about 42% in the fourth quarter in terms of gross margin. Is that fair?

Yes, it would to get to the 41.5%, Jason, but again, we can't be jumping around quarter-to-quarter and jumping it's this now, its this the next week, its this the following week. We give guidance for the year and we try to stick to that. It would take 42% to get that. Is that going to be difficult to achieve? Yes. I think it's fair to say it is going to be difficult to achieve. Are we unable to achieve it? I would say, no. It's possible that we can. That's our goal.

But I think more important is this. We said 38.4 and 150. We're well ahead of that. There may be some adjustments, but the other part that will offset -- I think, the real issue in a business and you may differ from I there, is our earning power and our return on equity and those are the things in driving that topline and building our franchise. Those things are all in place.

I don't see a retraction to where we were in the past. I see us still moving forward and as these prices come through and we work through it, the Company is going to be on track to be able to improve, over time, our gross margins as our plan is and to increase our profitability. And that's what I think is important. I think we all think that.

Okay. Fair enough and then just for me, last question. The impact from Hurricane Ike, did it impact either revenue or gross margin in the third quarter?

Fred Lampropoulos Well, you'll recall that what we did is we took that, as is required under accounting rules, to take that, apply that as an SG&A cost, so it is in there. So the answer is it did not affect gross margins in the period. Now, in terms of revenues, we were pretty well able to fulfill all of the requirements that we had. I mean that shows off in the catheters and this sort of thing.

Now, is it where the risk is? The risk is that when you're down for three weeks, that means that you're going to have some back orders, so to speak, going forward because you got to catch that up, plus hit your additional stuff.

Now our production guys are telling us that we'll be all caught up and we'll have all of the standard inventories on the shelf including new products as we go through the balance of the year. So are we are going to have some spot shortages? Yes, but how -- this is what's really interesting. As we've worked through this and now it's been about three week since we've been up and running full time. Our back order has not increased. In fact we watch it every day, appreciably.

So I think we're managing it and we're building the things that we need to do to make sure we get them to customers on time. So there's a risk that you could see that, if we drop the ball and we build the wrong things, but I think it's a manageable and to be very candid with you, I think it's a negligible risk.

Okay.

Any risk to the revenues would be in the fourth quarter

Yeah, it would come if there wasn't --.

And that's where that insurance thing is going to kick in we were talking about, that we don't know what it is yet, but it should be covered by insurance.

Yes and that's another thing. We do have business continuation. Any loss of those sales are covered by our insurance, which is kind of nice. We hope we don't have to file a claim.

Yes.

Okay. And there's going to be no spillover into the fourth quarter in terms of Hurricane Ike-related costs?

We don't think so. We think we pretty well have it wrapped up and I think we're pretty conservative in our approach to it, in terms of material labor and our deductibles and those sorts of things and I think that's pretty well met.

I mean, even though we were only down for short period of time -- and I think we can classify this as minor damage, we didn't have anything catastrophic or anything like that -- it was still a pain and a lot of work and took a lot of time to get this stuff done. I mean we had to get at the sites and it's the fastest growing part of your business. We put all the resources and again, I want to commend our guys. We did a great job, a great job of getting this thing assessed, an action plan -- Jason, you would have been amazed if you would have seen all this happening. It was amazing.

And here's the other thing to. I got to say this. None of our employees lost a nickel of wages.

They all got paid extra (inaudible).

Everybody got paid. That's in the numbers. We took care of our employees. We didn't lose employees. We did what was right and that gives you strength.

We paid a lot of bonuses and premiums for people to come in and help us put it back together, plus paying the ones who couldn't come.

Yes. We moved our inventory out of harms way. We had people on the ground. We got teams in, carpenters in, roofers in. We had staff. I was on the ground, Arlo was on the ground. I mean we there a day after and there were dead animals in the street, there's trees, buildings. I mean, the place got -- it looked like a bomb hit the place. If you -- I mean it was horrible. We saw what happened in Galveston. We're 45 miles of west of Galveston, 50 miles south of Houston, it was a mess. We did it better than anybody in that area. I mean, it was extraordinary, extraordinary.

To answer your question, all of those costs were already in our estimate that we accrued for.

Well, nice job guys and that's it for me. Thank you.

Hey, thanks Jason.

James Sidoti, Sidoti & Co.

Good afternoon Fred.

Hey Jim, how are you?

Good, good. I just want to be clear. I think what you're saying is you're looking for growth somewhere between 8.0 to 10% in the fourth quarter, based on your annual guidance? Does that seem reasonable?

Oh yes, it's reasonable.

There's some upside to that.

Yes. I think there's quite a bit of upside to that, Jim.

Okay. And on the bottom line, I think the last time you gave guidance was you were around $0.70 to $0.72. Do you have an update on that?

We have no reason to change anything that's out there in terms of what's on the Street, even with some of these extraordinary expenses. I think we are fine.

Okay, so that 70, 72 is around right around ballpark for the year?

Yes, yes.

And then looking ahead, if the dollar does continue to get stronger over the next couple of months, is your national hedge enough to kind of mitigate that impact on the bottom line or do you have any financial hedges in place?

We do.

Yes. We both hedge our receivables, we do that every month and then we have --

Kent Stanger" And the cash balances that we have.

Our cash balances that we have, as well as, remember, we have the manufacturing facilities, Jim. So, it's not a big deal to us. It is really negligible.

So, basically, the strengthening dollar, although it may slowdown some of the topline growth a little bit, it shouldn't have any impact at all on the bottom line?

That's correct, very little.

Kent Stanger Very little.

Because of our manufacturing costs in Ireland offset that because it will be lowered.

James Sidoti Okay, alright and -- .

And then one other thing I'll add to that is it adds profits in a lower tax environment, so the tax benefit helps to hedge that a little bit for us, too.

Yes. That's another good point, yes, that's right. So as labor costs come down, you make more on either of those or tax of 12.5%. That's a very good catch, Kent.

Of the 30% or so revenue that do sell overseas, how much of that is denominated in your local currency and how much is in dollars?

Oh boy. Jim, I'm going to have to get you back to that, but do you know that number?

Of our foreign currencies, it's about 11% of our sales.

James Sidoti Right. Okay, so, 11% of sales is denominated foreign currencies?

Yes and there's 3.0 or 4.0 mostly the Euro, but we have the British pound and we have the Danish and Swedish too, but they've stay in lock step pretty well with the Euro, those two.

But again, it's not a big deal.

It shouldn't be a big deal then. Okay, alright, thank you.

Hey, good Jim, thank you.

Gerald Johnson; SG Capital Management

Yes, hi guys, congratulations on the quarter. I'm speaking for Ken Grossman from SG Capital and I'm sorry if you guys already addressed this, but can you provide a general sense on '09, given the uncertainty of the environment?

In terms of guidance and sales?

Yes.

Okay. Here's -- we have not provided guidance yet. We are in the process now of forecasting and budgeting for '09. However, based on what we see and what we see as the acceleration of our growth, we expect to be in double-digits growth for the entire year of '09.

Okay.

So this year, as you know, we were at 5, we were at 10, we were at 15, but we would expect to be somewhere in the low double-digits is where I would expect to be. And then hopefully, we can do even better than that for the entire year, so pick a number, say 12%. I think we're capable of doing that; possibly better.

Okay. And do you think gross margins will be better too?

We believe that as we add more volume, as we are disciplined in our approach to our business, as we have higher margin products come on board that we, in fact, will see higher gross margins. That's our goal.

Okay, all right. That's all I had to say. So thank you and good luck on the next future quarters.

You're welcome. Great, thanks. Give my regards to Ken.

Thanks. Bye

(OPERATOR INSTRUCTIONS) We have no further questions, please continue.

Well, let's go ahead and close and summarize. Again, we appreciate your interest . Again, as we all know, there are difficult times not just in United States but across the world in a slowing economic environment. We believe that the Company is well positioned with new products, with a strong and a franchise that is getting stronger. We believe that we have a plan in place to take advantage of the opportunities.

This staff has worked very hard. We believe that many of the new products that we have are more than singles. We have some products that, when we file our 510(k)s, we'll discuss. We have a number of acquisition opportunities. In fact, as I said earlier, several other product inventor issues that Merit is in the process of finishing up that we will be discussing at a future time.

It's actually a very good time for Merit, a very good time -- no debt, plenty of cash flow, record EBITDAs. We couldn't be in better position. We simply to need to keep our senses about us. We need to keep our heads down, eyes open, and keep doing the job that we have done and this is a great staff and a great opportunity in a difficult market environment.

We believe that our shareholders are well positioned in our stock. I know our stock price has been very volatile and candidly, somewhat irritating, but we are all irritated with all of this. But we believe that the critical issues of the day are growth, quality growth, sound financial and accounting principles and just being straight up and that's what we try to do. We believe that we have done that and we will continue to do that and bring what we think are superior returns, comfort and security to our shareholders. The market will have its volatility, but Merit will deliver. We've said it in the past. We've done it. We'll continue to do it.

I want to express my thanks to you, to my staff, and we're looking forward to several years of tremendous growth and opportunity in this Company, which, as these markets come to appreciate that and stabilize and candidly if they don't, we are still, we think, a place where investors should be looking very hard at Merit.

We will be attending several trade shows. We will be traveling to Europe to make presentations, so we're going to be making sure that we are very active making sure people know our story and why they should be investors in Merit and take advantage of what we think are very low prices at this point.

We thank you again for your interest, your attendance in this meeting and we'll look forward to reporting results to you in the future. So we'll be signing off now from Salt Lake City, wishing you a very nice evening and good

Ladies and gentlemen, this does conclude the Merit Medical Third Quarter Earnings Conference Call. You may now disconnect. Thank you for using AT&T Conferencing. .