Merit Medical Systems Inc (MMSI) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Merit Medical System's First Quarter 2009 Earnings Conference Call. (Operator instructions)

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

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos with members of our staff in Salt Lake City and our beautiful snow-capped maintains. We have Kent Stanger, who is traveling but on the line in Atlanta and will be home later on this evening.

And I'm going to ask Anne-Marie Wright if she will read our disclaimer. 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 and good afternoon, ladies and gentlemen. We're delighted to report today the results of our first quarter. As you can all see, Merit Medical reported record sales o f $58.4 million, up 9.0% as compared to $53.6 million for the first quarter of 2008.

I should mention that in this quarter we had approximately three weeks of the Alveolus sales, which accounted for about $485,000. That was only three weeks. The sales were affected by about $700,000 of lower-than-expected sales from a large OEM customer - and I will come back to discuss that a little further on in the call - as well as about $1.1 million for FX effect and this is because of the strengthening of the US dollar.

All in all, I'm very pleased with the quarter. As you can see from the report that our earnings were $0.19 per share versus $0.15, a 28% increase. I think you can also see that our gross margins were up 220 basis points, over the year-ago period, at 42.5%. We're very pleased with the improvements that we see in gross margins.

In addition, you'll notice that the SG&A costs were 25.4%. Approximately 130 basis points of that were expenses that were incurred relating to the acquisition of Alveolus, and as some of you will recall, we discussed this previously, that under 141R those costs now have to be expensed in the period.

That being said, we also took a write-down in the quarter of about another $420,000, pre-tax. This was for some obsolete inventory and equipment and we impaired that, but the results take all of those things into consideration. I think, as you look at all of that, you'll agree that it was an extraordinary quarter.

We're -- let me talk a little bit about the groups. Catheter sales were up 25%. I think you're all aware that that has been the fastest growing area of our business for some time now and we believe that that will continue as we develop more vascular access products.

Custom kit and tray sales were 10%. You will notice that there is the one situation there where you saw a reduction in our inflation device sales. Most of that reduction was a result of the lower sales from an OEM customer. Without that, our sales would have been up 1.2%. So even that area, which is the slowest growing area of the Company, still grew, although marginally.

We expect to see improvements of that as we go on through the year with the introduction of two new Merit inflammation devices, one digital and one a brand new version of our basics line and that's a 60 ml inflammation device, which is used for peripheral and esophageal procedures. And that will be a Merit product.

Our inventory continues to turn reasonably well. We continue to have no long-term debt, although you will notice that we had a substantial reduction in cash from year-end, as we used that cash to pay for the transactions. We also repurchased $2.5 million worth of stock during the quarter and at the end the March we had about $16.4 million in cash.

Another thing that I'd like to bring your attention to is our tax status and that is that our tax rate was 31.4%, compared to 36%. That has to do with the large volumes of product and the direction that we're going in, in Ireland.

And Greg Barnett, our Chief Accounting Officer, would you just shed a little light on that, Greg?

Yes. We were -- during the quarter the strengthening of the dollar helped their costs to be lowered, plus the material costs, their purchasing, went down as well and they had some increased volumes for production. So all those increased their profitability, which are taxed at a lower rate, at 10%, versus a 38.7% in the US. So that helped improve the overall effective rate for the Company for the quarter.

Thanks, Greg.

Our research and development costs were about 3.6% of sales. I would like to remind everybody that Merit still intends to introduce about 15 new internally developed products this year and we're excited about many of those opportunities.

Some of the product that we have released in the first quarter was a 510(k) clearance for a microcatheter in the second quarter. We've already received and announced recently a clearance for a 55-cm dialysis catheter.

A product that we're very excited about, that we are starting to ramp up on and one that you'll hear a lot about during the year is the Merit Miser. This is a patented product that helps hospitals to control the costs. In fact, their largest cost in a cath lab is that for contrast media, so it's a very expensive proposition and we have a product that helps to save those hospitals money.

One other thing that I did mention in this press release but that we have recently received the CE Mark approval for our Richmond facility and that will help us in terms of moving various products to be manufactured in what we think is a more efficient environment overall.

DSOs are 43 days. EBITDA was a record $45 million for the trailing 12 months. So all in all, ladies and gentlemen, I believe that we at least met the expectations. In many ways, in our view, we exceeded those. I'm pleased, overall, with the performance of the Company for the first quarter.

As you all know, we talked about our performance for the year and that is $260 to $263 million and earnings at $77 to $79 million, with gross margins at 42.6%. We're not in any position to change or adjust any of those at this point, but if necessary one way or the other we certainly would do that as we move down through the rest of the year.

We're excited to have the Alveolus group online and we are, I think, doing a very nice transaction, or at least transition in that business. We've renamed the business Merit Endotek and we've hired four new salespeople, so we're excited about the opportunities of having those new salespeople onboard. They'll be trained over the next few weeks.

I'm honored and pleased that today we have a training class of several of our new salespeople, who are sitting with us, from Germany and I'd like to welcome all them and thank them for being here. They're sitting in the room and this is the first time they've done that. They'll be here for training over the next few weeks and so we're delighted to have you fine people here today.

So, ladies and gentlemen, that pretty well tells the story. Again, a 9.0% improvement in revenues, a 28% improvement in profits, a 220-basis point improvement in gross margins. So, overall, I'm pleased.

I'm delighted to take any questions that you have and I'll go ahead and direct amongst Kent or Greg and myself any questions you might have. So we'll turn time over to the operator and let's open it up and start taking questions.

Thank you, sir. (Operator instructions) And our first question comes from the line of Sean Bevick with SIG.

Good afternoon, guys. With the tax rate, can expect that lower tax rate going forward? I mean, the items that you said went on in the Ireland facility. Are those going to be able to continue?

One of the things that we need to do is to make adjustment from time to time. As you're well aware, each of the taxing entities wants to get their fair share and there's this taxing authority and it has to be adjusted. In this quarter, we already adjusted it for several hundred-thousand-dollars of tax that we paid from where we were a year ago.

Kent -- or not Kent, but Greg, do you want to give a little bit further color to that?

We're expecting about a 34% tax rate for the year.

Okay, great.

So we'll see. It'll probably bump back up a little more in the second quarter and then in the third quarter we have FIN 48 lapse, where it drops down to about 30%. But we'll probably be at 35 to 36% in the second and fourth quarters, but we're expecting about a 34% tax rate for the year, and if Ireland continues to be more profitable than prior years we will see a little more improvement in the overall rate.

And let me just follow-up on that a little bit further. We have several products that are being developed and that would be taxed at the 10%. So there's at least an opportunity, going forward, of several major products that will be major contributors.

And so I think we will see a major long-term trend downward on our tax rate because of those high margin products that are being produced in Ireland. You'll see some of the yet this year and you'll see it continue to progress as more and more of those products are produced there.

Kent?

Yes. I was just going to add to basically what you said. That it was part of our basic strategy. It's part of why we're in Ireland, not entirely, but I think we have some real opportunities for some of these new proprietary products and you've already said what I was going to.

We think it's our patriotic duty to pay a fair tax, but not to pay any more than we need to.

Okay, great. On the share buyback, how much of that is left?

We could -- I think we had, prior to this, an opportunity to buy up to, I think, 1.1 million shares. We bought 250,000 shares. So, if you subtract that out of the 1.1 million, there's your number.

Okay and are you still comfortable -- I know you basically reiterated your 2009 guidance. Are you still comfortable with the 2010 guidance you gave?

Yes.

Okay.

Yes. But we -- I said that and I believe that we're going to grow. We have a lot of exciting products and opportunities, but I'm okay with that.

Okay and lastly, the 130 basis points of expenses that were related to the Alveolus acquisition, were those like one-time expenses or were those operating expenses contributed from that company?

I'm going to let Greg go ahead with that.

We had -- there was $330,000 related to legal and accounting, which were a one-time expense. The SG&A was about $430,000 for ongoing business with their costs for supporting the salesforce in the transition.

After 90 days, as you'll recall from our previous call, $100,000 of that will drop off. If you'll recall, in the transition we were going to keep all of the employees for a 90-day period. We're about half the way through that, that expenses here. After that time we're, of course, keeping the salesforce and then shutting down certain aspects of the Company and we'll have a reduction of about $100,000 a month in expense.

Okay, great. Thanks, guys.

Thank you.

Christopher Warren, Caris & Co.

Hey guys. Just wanted to touch base on the inflation devices. Could you give us a hard number or a hard growth rate for what was reported in the quarter and then touch base on what you expect here in the second quarter?

Well, we don't talk out in front in terms of forecasting, Chris, as you're well aware, into the other quarters. In the first quarter we did about $14.3 million in revenues off the inflation device business. So that's what we did in that area.

One of the things that we have to look at here is we don't have very much visibility as to where that large OEM customer is coming from. But I would like to point out something that I think is very, very important and I'm glad you refreshed my memory.

If we take the large OEM customer out and look at the rest of that division, which you'll recall that we re-staffed and we've been very aggressive in our OEM business, we were up 41%, quarter-over-quarter, year-over-year, in our OEM business when you back that out. It's extraordinary and it's one of the fastest growing areas of our business.

And I'd point out a little bit in our note here that the reason it's so strong is that a lot of the larger companies are really looking for companies that are reliable in this economic environment and companies that they can get good value from. And so Merit has opened up more new accounts and more opportunities in the history of the Company.

So, although we could focus on this one OEM customer, it won't be very long and they will be a small portion of it. I mean, I don't mean to diminish the impact that they have now, but clearly it's declining and I expect that it'll continue to do so. The offsetting entry to that is, is that the OEM business is growing.

In fact, I think that the OEM growth in the quarter was about 2.5 times what the differential -- so there's about a $700,000 difference in inflation devices from that one customer. But the growth in the OEM for the quarter was about $1.6 million over last year, so more than overcoming that particular part of the business.

Great and one question on just the general business. Other companies have talked about a little bit of weakness and inventory de-stocking from the distributors. Are you seeing that in either the cardiology portion of your business or the radiology portion?

Yes. We've seen some areas, like for instance, we're seeing more geographical areas. For instance, we were talking about Central and South America. We are seeing some weakness there, but we're not seeing any weakness in the Pacific Rim.

We are seeing some weakness in Europe, but that's basically because of the dollar. So, all in all, if we take a look at our OEM business and our businesses overall, our demand, I mean, I think the 9.0% speaks for itself. There was very little of that that was Alveolus and we still believe that we're going to be in double-digit growth for the year.

I've looked at some other companies, Chris, like you have and I'm not seeing too many of them that are doing double-digit growth. Merit is and we did 9.0%, but we expect for the year that we'll be in those double-digits that we talked about.

And one last one, if I could, on Alveolus. So you added four reps in the quarter. Does that put you pretty close to the total where you want to be for '09?

When we talked about the quarter, we've added four to this point, so some of them are in the second quarter and so it's not just in the first quarter. They're spread out between the first and second. And then remember we only owned the business for the last three weeks of the first quarter.

And then to direct to your question, we have at least two more that we expect to add and we've moved that up a little bit. Rather than spreading them out over the year, we felt like the opportunity to get them online a little sooner, so we'll probably add those other two probably in this quarter, maybe in the early third quarter. So we'd probably move that up a quarter.

Okay, thank you very much, appreciate it.

Thank you.

Jayson Bedford, Raymond James & Associates

Hi, good afternoon, nice quarter guys.

Thanks Jayson.

A question on the gross margin. I'm just trying to figure this out. Meaning the last couple quarters it was about 40.5% and you just put up 42.5% on essentially the same revenue number and I'm just wondering what really contributed to the turnaround in gross margin. And then, is this a level that you can build on going forward?

Yes. Well, to go right to your question, the overhead variance due to higher production was about $700,000 and so, from our cost that's in the systems we're more efficient. Now, the Ireland and the favorable Euro-to-dollar exchange, now when we talk about that, remember the dollar is getting stronger.

But our costs in the system in our Ireland are at the higher cost. That was about 80 basis points. And then, if we take a look at the price variances and this is something we've talked about in the past, where we've seen the cost of raw materials come down, that was about 80 basis points.

I'll answer your question by saying we continue to invest heavily in automation. We continue to have our programs in place on cost savings. We continue to look at efficiency. So it's how we get paid. It's how my staff get paid. It certainly has our attention and we think that we're in the kind of environment that will lead us to be able to meet, hopefully, and exceed what we've talked about.

So we've given you the 150 for the year. We did the 220 in the first quarter. That's extraordinary. But if you look at it for the year I think we're about 10 basis points behind. So I believe that there's an opportunity when more of the Alveolus products come on. Those were, by the way, for the quarter and that short period of time we're about 61% and as more of that spreads in we think that that can help us going forward.

Remember I believe that we talked about the effect of that would be about 90 basis points for the year. So we didn't even get to see that in here. So you asked the question, "Can we do that?" We believe that we're going to have the opportunity as the business moves forward to be able to - I don't want to say improve beyond this. But we're able to at least meet what we said we were going to and I think you can read the writing on the wall, although it's still only the first quarter and we have to execute.

But our focus is on materials, on efficiency, on transportation costs, on higher margin new products and mix and that's where Merit's future is. Not looking at the past and I don't mean to offend antibody talking about inflation devices, it's a big part of our business, but it's clearly not the growth part of our business.

Vascular access and other types of therapeutic devices are where the future of the Company is. It's where we're concentrating and we will get the future value of the Company while still maintaining some of these areas in some of our legacy products.

Okay and just lastly on the gross margin, the $420,000 write-down. That was in the number. Are we going to see any more write-downs going forward?

Jayson, one of the things you can always count on from Merit is that we're going to look at each quarter and look at are there any impairments or anything. We do it all the time. But we did so well in the quarter we thought it would be a good time to take those and there were some assets that you might get hit at the end of the year.

And so if there are things that are suspect or some inventory or we think something might sit there, we're going to impair it. We've done it throughout the history of this Company and that's why you don't see adjustments at the end of the year. And Greg, do you want to comment on that?

Yes. Jayson, the $220,000 is in the margins. The other $200,000 will be in SG&A, so the full amount's not in the gross margins, just so you're aware of that split.

But nevertheless, we do it all the time. If something can't be sold and we have to scrap it and we have to impair it, that's what we do.

So this wasn't Alveolus-specific.

None of this was Alveolus.

Okay.

None whatsoever. This was all just -- it could have been a launch, it could have been some mix of some products we didn't have, or we had something where we made an improved process and of course sales guys don't want to sell the old stuff. And you have stuff sitting there and you can leave it sit there for several years and that's when companies get into trouble, when they pull those kind of stunts. Merit doesn't do that and Merit's never done that.

Okay.

And Jayson, one other thing on Alveolus. We have made estimates in our purchase accounting 141R and tried to book everything, including inventories and we do get a year's period in which to really to have a chance to adjust those things. So they assume (inaudible - background noise) that during that period, because we have a chance to true it up.

But one thing that does affect it, it was only about BPs, basis points in this quarter is the higher margins of it, so it was only three weeks worth of sales, so it helped us about 10 basis points. But, as Fred mentioned, in coming quarters that's going to be worth maybe 50 or something.

Okay. That's helpful. And then just historically, I think from an EPS standpoint, cost from a revenue as well, the first quarter has been the softest quarter of the year. I'm just looking at kind of your annual guidance and the strength of the first quarter. Is it safe to assume that you kind of endorse the higher end of that EPS guidance for the year?

No. No, we're -- I'm not going -- come on, Jayson, now, now. Here's the thing. First of all, it's interesting when you talk about the soft quarter. There usually is some slowness that's associated with a startup. People work out their inventory.

Last year, the third quarter is generally our softest here in the summer. But last year we saw the biggest improvement quarter-over-quarter in the third quarter, which was surprising to us. So I don't know anymore if we can really predict how these things work out, because we've been surprised on a couple of occasions.

So we're just going to stick with what we have. We've got a lot of work to do and some great opportunities and I should point something else while I have the thought and that is there are a lot of other great opportunities out here. This market has created a lot of turmoil and there's a lot of tuck-ins and opportunities.

And as I've said on every call for the last 20 years, Merit continues to look at that and is engaged actively in dialog for the opportunities that we think will grow our Company, so great opportunities out there. This market is still in a lot of turmoil.

Okay, that's fair. And then on R&D, how much of that was Alveolus?

The answer --.

About $50,000.

Yes. So it was in the noise.

Okay.

Yes.

And then last for me, I'll jump in queue. I guess the only weak spot in the quarter was the top-line growth and I'm just looking at the comp's get a little tougher. Your guidance is double-digit. What are the big, kind of, drivers in the remaining three quarters in the top-line?

Well, we've got the new MAK-NV. We've got the short sheath. We've got the new -- radial arteries are a big player. We've got -- the Miser is going to drive a lot of business. One of the things I think I mentioned on our last call, it's probably the sleeper and the biggest opportunity in this Company that I've seen in a long time, because of all of they business that it brings along with it.

We did well over, I think, 200 market performance trials and we're gearing for that business and I can tell you that it's going to drive tons of business. I'm excited about it. So the Miser is going to be a big product. I said the MAK-NV. We've got some --.

I think the rest of the sheath line is going to keep going well.

The sheath line. We've got some hydrophilic catheters that will be new to Merit, some -- a whole bunch of new product extensions. Jayson, I'll be happy to go with you over, offline and I'll be presenting and they'll be available. We're doing a presentation in New York, I think, on the 14th of next month and we'll have all that information that we can make available, because we'll be showing it there and we'll put it online so that you can see that stuff.

So a lot of stuff, our trays, our kits, I mean just across the board. If you look at the catheter line, that area, Short Sheaths, MAKs, S-MAKs. The Prelude radial is continuing to, I think, be a big improvement and we have another new radial compression that goes right along with that sheath. That's a new product that will be coming out this year.

So, just kind of across the board, a lot of good products and just an expansion of our business. That's a little nebulous, but it's just about everything.

Okay, thank you.

Okay. Alright.

James Sidoti, Sidoti & Co.

Good afternoon, Fred, can you hear me?

I can, James, how are you?

Good, good, just following up again on the R&D. Even though your sales were up 9.0% in the quarter, the R&D number basically was just a little north of last year and was down from the last three quarters. Is there timing going on, timing of projects ending there in this quarter? Should we look to that number to tick back up again, going forward?

We have a number of products that are going to be switching, that are in R&D. They're going to be switching over to manufacturing and then we'll replace those with new startup products. So, to go on a quarter-to-quarter, I think best I can do is just talk about what we think that expenditure is going to be for the year and we've guided, I think, that's about 4.0 to 4.5%, 4.0 to 5.0%. so, from this 3.6% I think you will see it tick up a little bit, yes.

Okay and then can you help us out on how to think about adding these salespeople and what affect that'll have on operating margins over the next couple of quarters? Should we see that -- do you think that'll put a little pressure on the margins in the second and third quarter as you start to train these folks?

Yes. There's going to be some, but they're in our numbers. They're in our budget. There is going to be that expense, but it's all included in what we've talked to you about. Although we've shifted them a little bit.

One of the great things is I've looked at all the resumes. I haven't interviewed these guys. We've got a staff that does that. But they're all people who have experience in this area. They've worked for some of our competitors or they've worked in associated markets.

So, although they'll need some training, I think that it's fair to say that they take, usually, about six months before they're at full steam. I mean, I don't know that these guys are any different than any of the other sales guys. It does take some time.

I think the other factor, though, that I, that we'll see, is the guys that are out there, the other 10, 11 or so guys that were out there, I think we're going to see higher performance levels from them. And the reason that we'll see that is because now they're at peace, they're all signed on. They're all moving forward. They don't have to worry about their careers and all that sort of stuff. It's in place.

And so, when you get people like that, they're going to more productive. They're going to have more confidence and they're going to be out on the street and they're going to be managed. Not they weren't, but we have expectations and we look at them and so I think it's more the 11 that I expect that will pick up the slack for the other ones while they're being trained. And then I think we'll get into a full head of steam as we come through the second half of this year.

Yes and just a general comment. If I look at your numbers, unlike almost every other company I've seen report so far, if I was just looking at your numbers and not reading the newspaper, I wouldn't know we were in the middle of this economic turmoil. Are you feeling any effects in the economy and if not, why do you think your numbers are holding up so strong?

Jim, I love you, deeply. Well, I think it goes back to Merit. I looked at one company the other day that's kind of in the same area that we are and their sales were down 20% and I've looked at others. I think it has to do with our broad range of products, our geographical presence.

I think it has to do with the spread of the kinds of products that people have to use. This isn't something that you can say, "I'll schedule later on". These are things that have to be taken care of. I think another part of it is our OEM business, where, again, we've seen, even on our side from some of our vendors, where they're getting weaker. And we've had some expenses and costs of replacing some existing vendors because they've fallen out, gone out of business.

We've seen all kinds of things. I don't think other medical device companies want to have to deal with that. So that's another important part and why we saw that business, quarter-over-quarter, year-over-year up 41%. So, I think if you add all of that up, products that are complimentary, sales effort, point-to-point.

Our national accounts. We've got Todd Oldroyd sitting here. We've been able to go out and land national accounts. I'm aware at least of one situation just in the last couple of days where we picked up $100,000 worth of business at a hospital in Virginia. With good margins, simply because of the work that our national accounts guys have done. And as I've said to you, Jim, there really essentially is not a hospital in this country that we cannot get into.

Now we're also starting to work on those national accounts and buying groups in Europe. So I just think it's we're just executing. I saw a bumper sticker years ago, "I heard there's a recession, I've just decided to ignore it".

Okay, Fred. Thank you.

And one other thing I'd like to add is I think that the recession, for us - you've talked about the top-line - is really helping us in many of our costs and we've talked about some of those inputs in our gross margin, where we had relatively fixed costs. So we've been able to increase volume, save on freight and things that we were able to pass those overhead applications into the gross profit area. And then the material costs have been dropping.

We talked about having a lag from last year. Well, that's coming through now and you can see that in the margins. And then, when you see the fact that even though we've been talking about this offline being a little weak, what's almost entirely attributed to the strong dollar and exchange rate advantages or disadvantage on the sales, it's the same thing as an advantage in Ireland. And when you tax it less, it's causing us to actually make more money, I think, almost, with the stronger dollar. So those things are opportunities.

Jim, let me just weigh on one more thing, too, again, because as I'm looking around the room at my staff, I look at my engineering, my operations.

If we take a look at freight, one of the things that the high freight costs did to us last year was, of course, put a lot of pressure in terms of our momentum. But we'll save over $1.8 million this year just in freight costs, because we're now sending them over on the water.

I mean, so some of that shock that came to all of us in this country is something that we responded to and we have a good portion of that cost now and that space. As you know, many of those things are going over 50% full. We're going to have that space at those lower rates and that's $1.8 million worth of savings.

So we're kind of hitting on all cylinders in our business. Our sensor business, our technology companies, our domestic sales and I think with the re-staffing of Europe and these folks that are in the room today, there's a lot of optimism. As we look not just three or six months, but as we look at our business, we look at Merit over the next several years. We're going to continue to perform and build this Company and we have targets for earnings, like a buck and $1.50 and those sorts of things. And I think we're going to represent tremendous opportunity for investors.

All right. Thank you, Fred.

Thanks, Jim.

(Operator instructions) James Terwilliger, Duncan-Williams Inc.

Yes, thanks. Hey guys. The quarter looks great. I've got a couple questions. Some of these have been answered, but I'm going to go back and hit them again. Just very briefly on the gross margin, it was much stronger than I was looking for. Is this a function of volume efficiencies, bringing down costs, product mix or price increases? If you would break up what's driving the better than expected gross margins, how would you define that?

I don't think there -- we're not raising prices. So we're holding prices but not raising prices. We did a little selectively, but I don't think that's an issue at all. It's the higher production volumes, is a key factor in it, and the efficiency in automation and those things.

The Ireland issue is -- it's so interesting, but for years and years we have worked very hard to build this Irish operation, 15 years and now that investment is paying off into the products that they're building that are supporting the catheter group, which is growing the fastest. And Ireland builds a good portion of those wires in some of those products that support those products. That's part of it.

We got a little bit of help from the higher margins and mix from the 61% off the stent business and then the lower material costs. That, again, as we've discussed several times, was about 80 basis points and we continue to hammer on those opportunities. Like, for instance, on the $1.8 million that we're talking about on freight costs, that directly effect those gross margins, that's just starting. It's in full effect.

We've got shipments going out of her every week now and that pipeline is full and so we get the savings and Ron, tell me the difference in that cost per week, just to give --.

About 24,000 air and about maybe 5,000 oceans per shipment, per 40-foot containers.

Is that a week?

Yes, per week.

That's almost 100 -- that's a lot of money.

It's twice as much product.

Yes and twice as much product. So it's a significant thing. So it's all of those factors that we discussed, James.

Well, great job. It sounds like you're hitting on all cylinders. I'm going to jump to the R&D and like other people have said on this call, the number in actual dollars was much lower than I think a lot of us had modeled in. But I know that your in-house product development, you've got a very full product pipeline and you picked up some acquired products.

First of all, I want to clarify. I believe that you said approximately $50,000 of R&D from your Alveolus acquisition?

That was about $58,000 was all that we covered. But remember that that's only for three weeks of the quarter.

Absolutely. Fred, can you talk a little bit about what's in that -- we've talked about the stents and the margins and the growth rates there and the attractive valuation that you got on that acquisition. But can you talk a little bit on this call about what you picked up, what you acquired in the R&D pipeline in that deal?

No. But thanks for asking.

No? That all right.

I don't mean to be smug about it. I will say this, that we are actively engaged in a covered biliary stent and doing trial work in Europe on that and we have several other stents that we've had dialogs that have not been started but that we are starting development of now. So some of that was that ongoing work.

There are a number of new products and now that they're under our wing, that we are starting to define and work forward. So we expect that as we move down the road, we'll have more and more stents come to market, but they'll take a few years to do. These are not things that are going pop up this year or next, although the covered biliary we think is very, very important. That's the largest non-vascular stent market and we believe that that's there, that we want to focus on.

So I will tell you that just this week in a hospital in the US, we deployed a couple of biliary stents that were bare metal stents and the physician sent me an email telling me that they were extraordinary. He loved the delivery system and he actually preferred it over their existing product that he was using from a large company up in the Boston area.

And so that's encouraging to me, that as physicians -- it doesn't make any difference what I think. It's what they think and I love getting those emails when a physician takes the time to write me and tell me that he believes that this product is a superior product.

I'm very exciting about the acquisition. Is it safe to assume, though, that Alveolus may be, during this difficult economic times, may be de-accelerated, some of their R&D --?

No, I don't think so and the reason I say that is because we still have this whole demographic area that the issue was working for us. We still have very little penetration or anything going on in Europe.

We have several of our distributors, including our Japanese distributors and others that are excited to get this product. It's a great product. So both geographically, demographically and just coverage -- remember, we only had 10 guys covering the entire United States and we don't have anybody covering Europe right now. So just that alone and just getting our market share is going to drive growth.

Now another thing that's exciting about this whole issue is the other products that we'll be developing or acquiring that will fit perfectly and they've never had any of those products before. They've had a few, but they're going to have inflation devices, they're going to have other GI products and syringes and other types of things and kits that they've never had before. Those are products that we already have.

So we think we can generate sales, profitable sales, high margin sales, but we don't have to spend a lot of money on research and development. They're existing technologies that we've paid for, for years, so we're excited about the growth of that business. And I think equally importantly is the core, the base technology and what those things can do for other endovascular types of products.

And again, I just had my R&D guy hand me four new stent products, which I'm not going to tell them about, Jim, so I'm going to hand it back to you.

When you did the Alveolus and the Biosearch deals, I was under the impression that you had CE Mark approval but you really weren't doing much -- or they weren't doing much with those products over there in Europe. And I thought that would be a big opportunity for you, going out in the second half of '09 into 2010. Is that a correct assessment?

That is correct, absolutely correct.

And when I'm looking at -- when you broke out the R&D number from Alveolus for R&D, can you tell me how much of the SG&A number it came in through Biosearch and Alveolus?

Yes. It's right here. It's about $434,000 for Alveolus. There's really no cost that we're showing for Hydromer and Biosearch. They're really relatively small, because we're basically just integrating those into our salesforce.

So there's not much there. Most of this other cost is -- and again, as I mentioned in my earlier comments, we have this extra cost that we have for the first 90 days, because of the staffing and the facilities. After 90 days from the closing, about $100,000 a month drops off.

But, again, I want to point something else, just in fairness and that we don't get our enthusiasm here beyond where it should be. The Alveolus division is losing money. That doesn't sit well. We'll build it, we'll structure it and we'll do like we did in our business down in Richmond. We lost money in that, but we'll focus on these areas. We'll bring these new products out. We'll get more salespeople. We'll do cross-selling of our products that go into that area and we'll build a profitable division.

I'm going to switch to the balance sheet very quickly. On the inventories we had kind of a $5.0 million sequential increase. I know you've got some companies coming in, some acquisitions closed. You've got a full product, new product pipeline. Where should that number peak at? Is that about a $45 million inventory number going into 2009?

I'm going to let Greg Barnett comment, if he can. Greg?

We had about $2.2 million in that number from the acquisitions. We'll probably see that still trend up some throughout the year, as we build the B-list business there with the stent, but we're trying, of course, to improve our turns from where they were last year. And so you'll probably still see some growth in that throughout the year, but we're trying to keep the turns down as best we can, or improve our turns so we keep that inventory balance (inaudible - multiple speakers).

(Inaudible - multiple speakers) shouldn't be (inaudible - multiple speakers) --.

There shouldn't need to be a lot. We've got a little extra in some areas that needs to be sold, but then in other areas we'll probably -- I hope we can keep it pretty flat as far as the total dollars. And then we shouldn't forget we've got the Hydromer business that is going to need to be inventoried, because they've been in backorder. So we'll have a little bit more of that, I hope, as we get that production going on our own, so Hydromer should help too.

And James, let me also point out one other thing. Because of the turmoil that we're seeing in the marketplace, there are some situations where we've bought larger safety stocks, where someone's either gone out of business or where there's this or that. There's still a lot of turmoil. In fact, you'll recall from my last call that I thought that the largest single risk in the Company were the effects and risks of outside vendors.

Now most of those are backed up, but they still take time and sometimes you have to buy enough inventory to cross you over, so that, I think. Some of this is coming from that ongoing turmoil that still exists.

Some of the increase in inventory, as well, is building these ocean shipments. We're going to have inventory on the ocean now and those are about five weeks of inventory. So that causes some increase as well.

Yes. Again, it takes about 30 days versus about seven days to take it and fly it over and drive it where it needs to go and so you have to fill that pipeline and that's going to cost a little bit more. And that's part of what's in those numbers as well.

All right. Thank you. And on the other assets, the increase in the intangibles and the goodwill, is that all deal-related? Is there anything else in there we should know?

It's pretty well deal-related.

Yes.

Yes.

All right and my last question and thanks ahead of time. I'll jump back in queue. I mean, Fred, you've hit this before. I'm going to ask it again, though. In terms of the marketplace, I mean, I'm looking at different companies. I'm hearing from hospitals. I'm hearing from different vendors that the procedural volumes have declined. I mean, I'm looking at you guys and I'm saying that your single-use, your non-CapEx, you're cardiac-focused, you're non-elective. I mean, you're relatively as immune to the economic slowdown as one could be.

What are you hearing out there with hospitals and clinicians? You're in front of a lot of them. And what are you hearing in terms of the US and the EU and I know you've talked about it again previously in this call. I don't want to beat a dead horse, but I mean, that's a million-dollar question for a lot of investors at this time.

Let me (inaudible - multiple speakers) --.

And I want to, again, congratulations on a good quarter.

Thank you.

And thanks for the time, but talk a little bit. Fred, you just mentioned turmoil. Talk a little bit more about the turmoil, if you don't mind, please?

Let me go to part of your comments where you said we're in the cardiac area. Remember that half of our business is in the interventional radiology business. It's also where we're focusing and have focused our research and development for some time, so that's another important factor. We're in the critical areas where people have to have these procedures. You can't delay them. You can't say I'll do it later on or after this or that. You have to have these things done.

I think, again, it goes back to the geographical issues and opportunities. We're still going direct in one new country or two each year, so we're going from wholesale to retail. That's relatively small. But as you start to add that up year-over-year, it starts to move that in that business.

Remember there's always a bull market someplace. I think the quote, who's that, Jim Cramer or whoever the heck said that and if you take a look at Japan, you're seeing that with the strength of the Yen. They are purchasing more products because it costs them less, so there's another factor there and we're blessed to have all of these various factors working.

Now I'm a little bit concerned about Europe. I mean, we're doing great in the manufacturing. A lot of that's coming back and I'm saying that because I have five new German reps sitting here and they're going to take care of my concerns.

They hear you saying that and I hear me saying it and we think that this is a great opportunity when other companies are downsizing and when they're not doing so well, to really pick some really wonderful -- these folks. These are tremendous folks and I expect a lot of them, so we're spending a lot of time.

Marty Stephens, [Laina Butell], the folks that work on our staff there are really taking advantage of what we think is weakness of our competitors and of the environment, to strengthen ourselves and to move forward with these opportunities, with these products in those markets.

So, yes, where is the Euro going to go? I don't know, but one of the great opportunities we have is that we have that natural hedge in place. It's not going to be too much one way or the other, but we're protected. We're getting some tax benefit. We -- it cost us $1.0 million in the quarter for FX effect. Okay. Well, we pick it up on the other side with the lower cost on the production side in Ireland.

So I don't know if the concern on the call is somehow that this is a fluke or a one-time deal and to be very candid with you, the sales number was below our expectation, internally. I can share that with you. I thought we'd do a little bit better. But I'm not unhappy with 9.0% and we also spent an awful lot of time over the last three or four months, actually four or five months, putting these deals together. It took a lot of time and a lot of focus for us to get those deals done and we couldn't spend our time in all these things.

We also had some restructuring in our sales and marketing. Marty Stephens took over some other deals. We brought some other folks up and changed those. So we're doing it. This is a dynamic company. But, all in all, I don't see my competitors developing new products. They're still ignoring the areas that Merit recognized 20 years ago that there were opportunities to bring new technologies.

Another important thing, in the first quarter, I think between the fourth and first quarter more new patents issued than any other time in Merit's history. So we continue to create technology, intellectual property. Our technology is growing.

And I want to point out one other thing. This is a long answer to your question. But another area that's working really well and going back to our technology companies. We have our sensor company here. They're kind of quiet. You don't hear a lot about them, but we have two or three major contracts with companies on sensors and that helps our business.

We were over in Japan -- actually China, recently, at a trade show where our coated wires that are coming out of our MCTec business over in the Netherlands. We recently, in fact today, are in the process of quoting a large Japanese company that's looking at buying our coated wire.

So there's been a lot of opportunity created. I think we have a solid business plan and we're just driving that plan. So -- and I think, as we -- and there's still these great opportunities. That's the other thing. I've never seen more opportunities that tuck in very nicely, that fit right at our point of sales.

My staff is looking at -- they're all giving me googly eyes right now. They're going, "Will you please stop?" They all want me to go on vacation. I'm thinking about taking a day off in July, so that's July 4th, by the way.

So all the kidding aside, there's just much to do. So thanks for the question and I hope I answered it appropriately.

You did. Listen, I appreciate all of your time and you and your staff. Congratulations on a nice quarter.

Thank you, sir, we appreciate it.

Thank you. And Mr. Lampropoulos, there are no further questions. I'll turn the call back over to you for any closing comments you might have.

Well, thank you very much. I appreciate the questions. They were good questions. We appreciate your interest in the business. You know, despite all this discussion that we've had, we have a stock that's come from a high of $21.00 or $22.00 and we're sitting down here at $13.00 and change and that's disappointing to me.

What's not disappointing to me is our plan, our balance sheet and the people that are sitting in this room that worked so hard. We believe that this is maybe the greatest time and the greatest opportunities I've ever seen in the 30 years I've been in the medical device industry. Despite the turmoil, the political uncertainties, all of these things that are going on, it fits right in our sweet spot, because we planned for it. We've worked for it. We've prepared for it.

So we believe that there's a great future for the Company. I'm not talking about quarter-to-quarter. I'm just telling you that, as I look at our growth rates in our business, I can look down five years and see a company that's twice the size that it is today, with improved gross margins and profits that will more than double as the size of these things.

Which means that some day we're going to look back and say I remember when I had a chance to buy this stock at this price and I didn't or I didn't buy enough and all this kind of stuff. That's fine. We're in markets. They go up and down, but Merit has a solid plan and a great opportunity.

So thank you all for your interest. We have several investments conferences coming up, five or six of them coming up over the next few months and we're going to be out there telling our story and we have other things that we hope to be talking about in the very near future. So thank you very much. We'll sign off from Atlanta and from Salt Lake City, bidding you a good evening. Good night.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and at this time you may now disconnect.