Merit Medical Systems Inc (MMSI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Merit Medical Second Quarter Earnings Conference Call. (Operator Instructions) This conference is being recorded today, Tuesday, July 28,2009.

I would now like to turn the conference over to Fred Lampropoulos, Chairman and CEO. Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Fred Lampropoulos. We're broadcasting from Salt Lake City, Utah today. We're delighted that you have joined us. I'm going to ask Anne-Marie Wright if she would please read the Safe Harbor Provision. Anne-Marie?

In the course of our discussion today, reference may be made to projections, anticipated events, or other information which is not purely historical. Please be aware that statements made in this call, which are not purely historical, may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties and other factors are discussed in our Annual Report on Form 10-K and other reports and filings with the Securities and Exchange Commission and 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 any such statements.

Thank you, Anne-Marie. Ladies and gentlemen, we're delighted that you have joined us and pleased to announce the results of our second quarter.

As you can read from the headline, our sales were up 13% over the year-ago quarter, at a record level of $64.8 million, up 13%. I think of significance, we should note that our core business was up 9.0% and change and we continue to be very strong in our overall business.

Our net income was $5.8 million, or $0.21. I believe that is ahead of the Wall Street consensus of $0.19, as well as I think the revenues themselves were slightly ahead of Wall Street consensus.

Just as a point of interest, they are record earnings and I think we were able to do that with some headwinds that came from the costs that we have previously discussed with you regarding the acquisition. And particularly of the Alveolus acquisition, which came with a salesforce and the expense of that, as well as more sales people that we have hired since that time. And we have a full quarter of that expense.

Additionally, we've been staffing up in Europe. We've staffed other areas in our OEM sales as well and so we're building, we think, for the future and to make sure that we have the horses out in the field to be able to take advantage of the opportunities that we see in the future.

All of the areas of the business grew, except for the inflation devices. This was anticipated and most of that decline comes from the issues as we watch Kyphon, which is, as you're all aware, an OEM customer. And we expect that those, because of that pressure, will continue to decline, even though that overall sector continues to be very important to us.

We will introduce a couple new inflation devices this year and we have a couple of other business issues that we are considering that we think will actually bring that sales group back into a growth mode, probably by the first of the year. I'm not going to discuss a lot about that other than to say that the product is very desirable and has other uses, as we all know, than just in cardiac and peripheral work. And we've had several inquiries and are now having dialog with a number of potential customers, which we think will help to enhance that business.

So, in overall, I think we're very pleased with the growth of the various areas of the business. Gross margins were 43.4%. That's up 70 basis points from the previous quarter and we're up 150 basis points year-to-date. You'll recall that as Kent and I have had these discussions with many of you in the past, we had promised 150 basis points for the year. We're there. Depending on how our business proceeds the balance of the year, we hope that we'll have an opportunity to exceed that.

Just as a reminder, we are entering into what we call our slow season. It's always a little unpredictable and we don't go by quarters, but we always caution at this time of the year.

I'll remind you that last year we cautioned on the revenue side and I think it was our strongest quarter of the year. But nevertheless, the summer, because of shutdowns in Europe and so and so forth, we're always an area where we get -- we're a little cautious, even we think that the business will still grow in the range of 13% or more for the overall year. Year-to-date I think we're up at around 11%, but we'll have the balance of the products for the whole year.

Kent, you had a comment you'd like to make.

On the gross margins, the second quarter was our strongest quarter last year, so that comparison is the toughest for us. As you look into the next couple of quarters, it was actually down sequentially, so I think it gives us good hope for the ability to maintain, hopefully, that 150 you were talking about.

Okay. I appreciate that comment.

Also, as a point of interest, is as you'll all note from the financial statements, is the higher SG&A costs of about 270 basis points and of course this is the expense associated, that we just discussed, with really those sales groups. Now, over time, we believe that that will normalized down into the 23.5, 24 [sic- see press release], but it's going to be into 2010 before we see that.

But nevertheless, we're making the investments that we have to make in order for the business and to have people out there selling our products. As you know, in the Alveolus transaction, they had about ten salespeople and they just simply had areas, geographical areas that were just prohibitive. So we have diced that up and we think that as we train and get those folks, which usually is a six-to-nine-month period, that we'll start to see the benefits of that product as we go forward.

We continued to spend about 4.5% or so on research and development and we'll continue to do that. Just as a point of interest, the EN Snare product that we acquired from Hatch is in pre-production. We expect that at the first of the year we will be delivering that product. That will have great implications relative to gross margins. I believe that it was 90 to 100 basis points that we'll see going forward and we think it's a terrific product.

Just about every place and everybody we talk to that we did in our diligence - and it continues on - is that people love the product and with the number of salespeople we have and the overall geographic presence, we think that that's going to be a terrific product for us.

Just also as a note, a number or a good portion of the international sales that came from that product, are existing Merit distributors and so the crossover into Japan, into Canada and other areas is going to be relatively easy in terms of the relationships that we already have.

A couple of points of interest are also on individual product lines and areas. We saw tremendous growth and continue to see that as we've staffed up on our OEM division. Our overall OEM division year-to-date is up 36% and up 28% over the year-ago quarter, quarter-to-quarter.

A couple of highlights of product areas that we're very excited about and part of our fluid administration and our swabbable valves for the quarter, up 33%, up 40% for the year. Our VacLok Syringes, a product that has been around for several years, continues to receive acceptance in markets from numerous OEM customers. That business is up 47% for the quarter and up 63% for the year.

Our new product, the Short Sheath, is up 122% and here's something else I'd like to share with you, because I think it points out and speaks to, really, Merit's products and the building of product lines. Oftentimes, when we release a product, these are products that we think have advantages over the competition, but they may have been in the market for a number of years.

I'll give you an example as the Prelude. The Prelude sheath has numerous catalog items and as we started that product line out, we came out with a basic package first and then moved it on to marker bands, we moved it on to radials, we moved it on to 23cm and so on and so forth.

That business, which we first introduced almost five years ago, for the quarter grew at, let's see here, 53% for the quarter and for the year 53.3%.So here we are six months down the line and now that we have all the pieces to the puzzle, we're really enjoying tremendous success and yet those products may have been written off or not discussed much.

But I'm sharing with you because we believe that this business can grow another 60% or 70%. In fact, it's our plan to grow this business another 60% or 70% by the time we get through the year 2010. Tremendous growth, but it takes time. We've built this product line out. I think we've been very, very strategic about it and patient. Nevertheless we're starting to see, I think, the bounties of the harvest and this product line continues to grow dramatically.

One last one is the ReSolve Drainage Catheter. For the quarter, the catheters were up 63%, 63% for the quarter and 71% year-to-date. I mean, that is just traffic and I think speaks volumes to the efforts of our salesforce, the innovation that's involved with these products and the acceptance of these products by our customers.

So, all in all, I'm very, very pleased about how the business is coming. We continue to have no long-term debt. So we've made these acquisitions, we've funded all this, funded all of our CapEx and we've paid everything in full. So that's a tremendous position to be in.

We've talked about gross margins. Kent, why don't you go ahead and jump in if there's anything you'd like to say.

Yes. I mean, I think we've done a reasonably good job of managing our cash flow. Our DSOs are up 42 days. Our EBITDA continues to grow. Its reached $45 million in the trailing twelve months, so we've been able to keep growing the business and still fund all of our capital needs and cash flow needs so far.

So just a couple other points, then I think the best thing to do would be to turn it over for your questions.

But we intend this evening to file our 510(k) for the project that we've discussed previously in Ireland. We're not going to talk about the product, for competitive reasons, but the important point is that we hope that within the 90-day period we'll receive that 510(k) and as we roll into the first of next year, along with the EN Snare product line, we're going to have some dynamite products, as well as others that we expect that we'll rollout by year-end.

So, all in all, we have a full pipeline, great opportunities, no debt. Gross margins are growing. Sales are doing terrific, particularly in this environment, and all in all I think the Company's doing just fine. So, Kent, any closing comments and then we'll turn it over to questions.

Yes. I think also I would just note that the end we've got -- our tax rate has improved over last year and so we're able to -- in part -- because of the improvement in Ireland, in large part we are paying a lower tax rate on that.

Yes and I think that maybe deserves a little bit more discussion in that this is a strategy. We produce a number of products. We're very busy in Ireland. It took -- it was years and years when it was a drag and now, again, we're enjoying the fruits of the labors of many, many years. We also have a tremendous amount of work that's been done here locally in terms of research and development tax credits in the State of Utah.

So as you look at all these things, I think that you'll see that our effective tax rate legitimately is in a place where we get to have the benefits of lower taxes. And particularly in the environment that we face, I think this is good news for our Company.

So that's it. A tremendous quarter, as far as I am concerned, improvements across the board. One little blemish on the issue, inflation devices, but that is not a surprise to us. We've discussed that and we're prepared to continue to grow that business as we move into 2010. In other [ed] segments of our business are really doing well.

Just one last comment and that is that we continue to see from our competitors that, in many of the areas that we compete in, they seem to lose attention and focus and they don't develop a lot of new products. And so we believe that with what we have on our plate and new products that are coming forward, that we're going to be able to grow in double-digits for the foreseeable future.

So, that's our report. We'll go ahead and turn the time over to you for your questions and again, thank you in advance for your participation. So, operator, it's your time.

Thank you, sir. (Operator Instructions) And our first question comes from the line of Dave Turkaly with Susquehanna Financial Group. Please go ahead.

Thanks. I know you mentioned in the quarter you did expand the salesforce and can you tell us like how many people you have now and where that stands kind of versus your goal for the year?

Yes. I've got all the folks right here. So, Marty, your domestic salesforce is --?

Yes, in the United States we have about 85 people in the field.

85, okay and in Europe?

We have about 25.

Okay and this is without your managers, so this is just ---?

No, this is including managers.

Including managers, so about 110 and then Darla, in the Alveolus salesforce we have?

16.

16. So one of the things that we did, David, as we had thought initially that we might buy a couple of these or hire a couple of these folks and spread them out over quarters. And then, as we looked at the training and the time and getting in, we moved them and compressed them a little, particularly on the Endotek division.

So we talked about maybe two in the second, two in the third and two in the fourth and we compressed those, because we thought we'd be more effective in training and getting those products out there. So those are the numbers on the salesforce.

Okay.

And we're pretty well done for the year, but there may be a few more, but we're pretty well wrapped up for the year in terms of those expenses.

Great and then on the charge that was in SG&A in the quarter, can you tell us how much that was?

Yes. Kent, I'll go ahead and let you --?

We're talking about -- to clarify your question, please? The charge meaning the amount --?

The thing that I would actually -- I would actually say I would -- you could exclude it. Not used to Fred saying it was a very strong quarter. But I think, typically, I would exclude acquisition-related charges, which would probably mean you beat by instead of $0.02, maybe $0.04.

Well, for the quarter SG&A and involved with our acquisitions was $1.9 million.

That's the incremental. Now wasn't there a write-off in there as well?

No.

No. These were all -- the expenses are all incurred in the period. There were no write-offs and I think that the expense for the three months was about $0.04 a share -- no, excuse me. For the six months is about $0.04 and about $0.02 for the quarter.

That's the net.

Yes.

I think he was asking for SG&A increase and that was about $1.9 million.

Okay.

And then there was R&D for another $340,000 and then we had contribution from sales net of costs and you end up with a $0.02 variance.

So, Dave, did we answer your question?

Yes and last one for me would just be -- you mentioned some of the products that were strong, but standalone division was up a lot. Would you say that the products you highlighted before would be the main driver of why that was strong this quarter?

In part, yes.

That's part of it, yes.

Some of those were catheters, though.

But some of those -- yeah. In fact, if you look at the drainage and the Prelude, those go down in the catheter division, so-- .

V-TEK was strong too.

MAPs were up. MCTech, our division that we bought several years ago from Angiotech on our wire, is up about 46% for the year and I failed to mention that. That's a terrific little business that we bought several years ago for about $3.0 million and its just doing terrific over in Europe. And this is one of our businesses that coats wire that used for hypo tubes and for diagnostic catheters, of which Merit is, of course, the largest user, so that business is doing very, very well for us.

So, yes, MAPs and Medallions and Needles were strong this quarter as well, in that group.

I think, Dave, one of the things that's really helped us is, as we've staffed out our OEM division, we've got the US and Europe staffed. We didn't have this done a year ago and I think that's one of the areas, as I mentioned, it's up, I think, 36% or so for the year and so we're doing terrific. Business is strong across the board.

Thanks for the detail. Thanks.

You bet.

Christopher Warren, Caris & Co.

Hey folks. Just to make clear, what were the revenues for the stent product in the quarter?

In the quarter, they were $2.339 million.

Okay, thanks, and --.

I'm wrong. I'm sorry, I made a mistake, $2.195 million for the three months, yes.

One ninety-five. Okay and any change at this point to what you think is reasonable for the top and bottom line for the whole year? Are you keeping pretty much the prior comments intact?

Yes, I think we're going to just stay where we are. There were some issues in the startup and the transfer of the stents and kind of gathering some of the trunk stock and stuff like this and we're also improving the biliary part of that business. We really haven't launched part of that.

But I can't say that these things were unexpected. These were kind of a few little bumps along the road. So, all in all, I think we're fine. If you take a look at the six months and look at $0.40 a share and I think we said that we were going to do 77 to 79 [sic - see prior press releases]. It looks that that looks quite doable and we have reasonable business at these levels then we're going to be just fine and hopefully we'll be able to exceed that. But I don't think it's appropriate for us to go ahead and make comments on it now.

Now, if we have a gangbuster third quarter like we did last year, you know we kind of upped the numbers. So I think we're okay for now.

Great and a question for you on the hospital pricing environment. I understand a lot of these guys are becoming more sensitive to the cost of devices and to some extent that may play competitively in your favor. Are you seeing any benefits to an increasing price sensitivity there?

We always have those issues to deal with, with the buying groups and those sort of things, but I don't hear a lot about it, Chris. I just don't see a lot of pressure other than what I've seen traditionally. So there's nothing extraordinary or unique in any way, even though there's a lot of discussion and everybody's talking about costs.

We think we bring value to hospitals. We bring safety to hospitals. We bring the ability to bundle and to customize and convenience. So we continue to sell that and as an example, last month in Great Britain it was an all-time record sales month in Great Britain. So we're doing the things and delivering the products that people want to buy, even in spite of what some people say are lower.

I mean, we see these numbers of lower admissions and lower procedures. We hear all of that stuff, but the way we have our business structured with OEM, with industrial types of products like our wires and our sensors - the mix, the geography. We're doing pretty well. I'm always knocking on wood, but compared to what everybody else and what the world looks like, I think we're doing terrific.

Excellent and one last question. Typically, as you go into the seasonally slow third quarter of operating margins decline, sequentially, are there any factors associated with the recent acquisition integrations that might be an incremental sequential positive from a margin perspective?

Not yet. I think, as we move into the first quarter of next year with the EN Snare, that we'll move into essentially a fixed cost environment. I think we'll see quite a bit of positive there, both on the gross margin side that we've discussed. But I don't think we've seen anything else at this particular point that would give us much of an advantage.

I mean, the stents have helped a little bit. I think - what was it - 220 --?

(Inaudible - multiple speakers) basis --.

Thirty basis point? Okay.

There was some help there on it and then on the other side, we've seen a lot of growth in some of our lower margin, like some of our kits and stuff that helped balance that out, I think, so.

Okay. Thanks very much. Nicely done.

Thank you very much.

Jayson Bedford, Raymond James & Associates

Good afternoon and thanks for taking my questions and nice quarter, guys.

Thank you.

A couple of questions. The growth in the custom kit and tray business accelerated quite a bit and I'm just wondering what accounted for that strength. Is it in either custom kits or the tray business or was there a new product there that helped boost that growth rate?

Marty, I'm going to let you answer that one. That's your area. Go ahead.

It's not a focus product, Jayson. That's the interesting thing for us, something that we're not really pushing. But, as we get more and more penetration into the labs with all of these other core products that we have, that becomes a natural byproduct of the salesforce and the sales process. And so I would say that and the other function is that there's considerable disruption in that marketplace right now and there are other players that are having some difficulties and I think that's helping us right now.

Jayson, going forward, we have the new Miser, which is rolling out now, that has a cost savings of about $700,000 a year on our existing sales and I believe that you're going to continue to see for, really, quite some time, continuing momentum in this particular area.

Now we like to sell those higher margin products, but all of these contribute. And although it's a lower margin in general discussion, when you start to apply that across the board and as Marty pointed out you get pull of a lot other products in both directions, we think that these areas across the board will continue to grow.

We have at least one, two, three, four new products rolling out that are in these kits and trays that have significant advantages over our competitors and we believe that will continue to pull substantial business from these guys. And when I say "substantial business", I've said this alone, that the Miser itself in my view could pull $15 million worth of additional business in both kits and packs over the next couple of years.

So there's a lot of momentum and it just isn't coming from the weakness of others, although I agree with Marty that that's part of it. But the other part of it is we've been able to -- when you develop newer products, particularly with our competitors who haven't developed any new products in some 10-15 years, you come out with something that actually improves, you get to see their soft underbelly. And we're seeing some of that as well.

So, all in all, the point is - and I've said it many times - our competitors in some of our areas just aren't paying much attention and are satisfied with their businesses as they are. Merit isn't. Merit is constantly improving products. So you're going to see continued growth and momentum in all of these areas.

And just on the competitive landscape for this particular product category, is the disruption you're seeing -- have you seen competitors exit the market? Or is it just a de-emphasis happening?

I haven't seen anybody exit the market. It's mostly that everybody -- that we see --almost everybody -- really doesn't have R&D projects. They don't have R&D expenses in new products.

And when you walk in with a new product that makes it safer to do a procedure, it helps to reduce the amount of time for a procedure and the convenience that's involved. We know, all of us know, that when you have a salesforce that motivated and encouraged and has that attitude, that's a great formula and that's what we've built this business on.

I think its quality and delivery as well. That's another key component.

I appreciate that. We've invested a lot of money in delivery systems and automated warehouses and we really are quite relentless on quality. We're not perfect, but the little things bother us and we stay after them and try to improve them and that's where we've seen, recently, that some of these other things just wear down and they don't improve them and they're just ripe for the picking.

And one other thing, too, that, Jayson, is very important and that is I think our national accounts guys, they're kind of like the unsung hero. They're sitting in the back of the room over here and they just sit there quietly, but what they do is give us access to all these accounts. So, for all intents and prior year purposes, we're not restricted from going anywhere.

In fact, on innovation we're exclusive.

Yes. We have some exclusives.

On this area.

Yes and we can go. So that's another really -- we never announce those contracts because you just don't know when they're all going to kick in and that sort of thing. But I think what you're seeing here is the results of that.

Okay, that's fair. On the Alveolus business or the Endotek, you mentioned that you haven't launched the biliary stent. When will you launch that?

Well, let me kind of clarify that. We are actually selling that product as-is to some existing customers, but there were a couple of areas that were important to us and that was that we'd be able to deliver it both percutaneously. and there were some improvements that we needed to make and we felt that it was important to do those things.

So, by year-end, all of those improvements will be completed. They have to do with lots -- a few -- they're minor little things, but in the practice of medicine little things are a big deal. And we thought rather than just go out there and be mediocre, let's go out and make these few little improvements that, unfortunately, at Alveolus they were getting sale time and wrapping it up and they didn't make those things. We decided to make them.

So we will, essentially, reintroduce the products by year-end. That's the commitment that we have. I just reviewed those products this week. Darla will be out this week with some more customers verifying those, but these are -- this is kind of a big deal for us and we just want to make sure we do it right. And we have four or five GI docs as advisors and we've really tried and we're very committed to building this division over time and we wanted to make sure we did it right.

So year-end is the answer. We think the improvements are significant for us to go out and capture both endoscopically and percutaneously a substantial -- and remember that this segment of the business is bigger than all those other parts combined. So, when you take esophageal, colonic, duodenal and tracheobronchial, this stuff is twice the size of all those markets combined.

So this is a big part of it and some of it, on the percutaneous side, is at the existing IR locations, which are the customers where you're seeing the growth of sheaths, you're seeing the growth of these drainage catheters and so on and so forth. So we want to do it right. We think we are doing it right and that's why I'm -- I don't like to project -- well, actually I do like to project out, Jayson, as you know. But I'm just thrilled with this business and that's why I'm pleased to stand behind the statement that we believe we'll continue to see double-digit growth for the foreseeable future, because it's what we believe here.

Okay and is it fair to assume -- you came in a little lighter than my number, just on that segment of the business. Is it fair to assume that it was because of this biliary stent kind of pushup?

Yes it is, yes, yes.

Okay.

And yet we're not upset or we're not -- we haven't lost our enthusiasm. These are things that we're doing because they're right things to do.

In the long term.

So we're committed to that business. We think it's going to be a terrific business for us and we're starting to see, Jayson, some other little areas that are coming out of this for opportunities too. It's amazing about all the opportunities that are out there, even in the environment that we're in. There's terrific stuff out there.

Okay, just a last couple questions. What was the FX impact in the quarter? Do you have that, Kent?

Greg, do you have that?

Or Greg?

Yes. We did to and I don't have that in front of me. Its --.

Okay, maybe --.

I'll tell you what. We'll get back to you on that. We'll get back.

Sure, maybe you could address it at the end of the call?

Yes.

And then a last question for me. You kind of teased a little bit with the 510(k) filing tonight. Can you maybe just talk about the size of the end market you're addressing with that product?

Yes. It's about -- I've discussed it before, but I'll go ahead and refresh it. It's about $150 million, we believe, and we've worked long and hard on this.

And I recently returned from a trip overseas where I presented the product in form to who I consider the master of this product and they -- he said to me that this product is better than the product that he had or he had built, or others had built. And that, to me, confirmed that we had developed the product to the extent and improved it to the extent that we had hoped to.

So we are gearing up for production and we're doing our qual runs. We've filed the 510(k). But again, for competitive reasons, we are going to wait just a little bit longer and I hate to do that. But the good news is, because I did say at one time I'd let everybody know, but it's so significant that we don't want to tip off anybody on this product.

And you don't sell this product international?

We do not sell this product, for all intents and purposes today, international, but we will sell this internationally. We'll have both the CE Mark and the 510(k) on it.

Okay, thanks. I'll get back in queue.

Yes. Great.

James Sidoti, Sidoti & Co.

Good afternoon, Fred, good afternoon, Kent.

Hi Jim, how are you?

Good. Can you tell me is there any opportunity to begin selling the EN Snare ahead of 2010 or do you think we should wait till 2010 to start to add that into our model?

No, the 2010 is the date of the -- the company that previously handled this product has the rights to sell it through the end of the year. Now, the other side of that coin is that we receive a substantial royalty for every one that they sell.

We're already starting to amortize the intangibles, but for the quarter - and remember we only closed this thing, I think, on June 2nd - net of the intangibles I believe it was $40,000 of income that we got from them. We'll get a full quarter of that royalty income for the third quarter in the fourth quarter and then so that would be somewhere around $120,000 or $150,000, somewhere in that range. And then we will be out on the Street with the entire salesforce worldwide with this product on the first of the year.

All right and then, if we look at Merit longer-term, Fred, you've already said you think you can keep the topline growth in that double-digit range for the foreseeable future. What should we think about for margins, Kent? Do you think that -- you said 150 basis points this year. Do you think you're getting to the end of the road there or do you think you'll be able to continue to improve margins over the next couple of years?

I wish this was a Webcast or a Camcast, because I always love it when Kent's nodding his head or shaking his head no. I always do that. Kent seldom does it.

The answer is no. We believe that with the product strategies that we have, with the automation that we have, with the applications of overhead, the mix and so on and so forth, that we're going to continue to be able to deliver improvements in gross margins. Both from efficiency, from lower unit costs, from higher margin products and then, of course, with the mix itself, but we're not going to promise any more than 150 basis points, which is what we promised this year.

The good news is we've kind of met that already instead of trying to catch up at the end of the year. So we think that is significant.

If I could, Jim, and just to jump in, if I could to Jayson's question, the effect of FX for the quarter was about $1.2 million.

In reduced sales, at the lower exchange rates.

So that's another factor. There's a little bit of a headwind there, but, again, we're still doing, I think, quite well even with those breezes.

Okay and then, looking out to 2010, you would expect the operating margin to expand less, and the gross margin, just because of some of these integration expenses should start to roll off?

That's correct.

Okay. Alright, thanks.

One other thing, too, just as a point of interest. You'll recall that we talked, when we made this acquisition, that we were going to have those monthly expenses that would run through, I think it was, June or so, so through most of the quarter. We've now dropped off that $100,000 a month of SG&A costs that was in there before that, going forward in other quarters, is now off the books.

Okay, great. Thanks.

So that helps us. So that goes to your question of rolling this stuff off and there will be others that will be absorbed up and others that will be rolled off as well, going forward.

Okay, thank you Fred.

Thanks, Jim.

(Operator Instructions) Ross Taylor, CL King & Associates

Hi, just a couple questions. I'll start with some of the expenses related to Alveolus that you just kind of finished up with, but going back to one of the earlier questions. I had thought there was a few $100,000 in attorney fees or banking fees that might carry over into this quarter. Is that correct or not?

No.

Very little.

No. There was very little that carried over in this quarter. Most of it we took as a one-time charge when we closed the deal. I think it was in the first quarter.

Thank you.

They occurred as happened in January and February and March and so there wasn't much overhang for us, fortunately. There's a little bit of accounting fees and stuff and I can go back, but it was less than $100,000 I'm sure.

Okay, alright and the next questions relate to the inflation device business. But can you give any rough projections as to how long before you think the Kyphon business might stabilize for you all?

I don't know that it's going to stabilize. I don't believe that we think it's going to stabilize. We think it's going to continue to decline and just simply because that's what's in the cards. There's also some new products they're coming out with and that sort of thing.

So, although it's been a very important business to us in the past and we continue to make all the deliveries and commitments that we have made, I think it's just a matter of time before that fades away. In many ways, though, I think, Ross, it's actually better for us, because we don't necessarily like having such a large portion of that OEM.

In fact, as we've restructured the OEM department, we're getting bits and pieces. We have one deal out there that we might bring on that could bring about $2.5 million worth of business in this area in inflation devices, but that's not $15 million. So I believe that it will continue to decline.

But I also believe that as we bring on products that go to the GI division - we're talking about, specifically, esophageal balloons and inflation and that area - as we talk about new digital inflation devices. We talk about the potential of some OEM customers and that sort of thing, that the business overall, minus that, will stabilize and grow. And that's my expectation, is that we will see the inflation device business grow and eventually both the OEM and inflation device will just absorb out that business and although we appreciate it, it'll just fade into history.

So, I mean, I don't want -- I mean it still represents $10 million to us, but as this thing gets bigger and new products come out and in fact, some other competitors of that product who are buying their products as they ramp up.

Now, what we don't want to do is to prognosticate big numbers from other competitors and new products, because we just don't know what they're going to do. But we have confidence in the inflation device area that Merit continues to be the world leader in inflation devices across the board, both for cardiology, peripheral and for spinal.

Okay and related to that, the new inflation device you mentioned you might have available around year-end, is that designed specifically for an application outside of vascular disease or is it applicable to vascular disease and something outside of that?

No, no. This new one, the new one that we're talking about for year-end is specifically with vascular disease, one that we would hope to see by mid-year, no later than mid-year is more in the GI tract. And we're talking more about dilatation of esophageal balloons and in those areas.

Okay.

But we are seeing, again, a number of interest in working with two or three customers on the basis of other spinal products that are coming and we're looking at and considering the possibility of maybe some partners in some other areas that we don't have a strong presence in, in which we may consider some exclusive deals.

So there's a lot of things going on in this area. We're paying a lot of attention to it and we think what we'll do. I mean, the net of it is, our expectation is that by the end of the year we'll swing this product line the other direction, even with Kyphon leaving. That's our goal.

Okay.

Or when I say leaving, declining or whatever they --.

Declining.

Yes, I mean it just simply looks like it's run it's course and that's unfortunate for everybody, but it's a high margin product, but we have other customers and other opportunities.

Okay and last question --.

And Ross, if I could, I'm just -- and a lot of other segments of our business. I mean, it's an important part but it's not the only part.

Okay, fair enough and last question. I mean, you guys had another strong quarter and you talked about the guidance a little bit earlier, but what are some of the primary risks or areas of kind of caution that you might have that are maybe keeping you from taking up the guidance?

Well, I mean, I think that whenever you come into the summer, traditionally over the years we've just seen some times when things just slow down. Again, last year it didn't, but traditionally summer, by definition, Europe shuts down. Germany shuts down, France shuts down.

Then you have weather. We start thinking about last year. We got hit in the quarter, if you remember third quarter and fourth quarter, expenses associated with Hurricane Ike and I get up and watch what's going on, on Weather Channel every night, usually about 4:00 o'clock, just watch it. So there's all those kinds of factors, just the general summer, the weather issues and that sort of thing and then there's people go on vacation. Our salesforce does. Physicians do. Those are always the factors.

And then around Labor Day people come back to work and away we go and we have a strong finish to the year and then of course the weather sets in and then all of these various maladies start to present themselves for opportunities and our business gets very strong.

So that's why I think it's just too early, both with this acquisition, with the weather, with the summer and I don't see any value in doing anything at this point. When it becomes -- and maybe that's the unfortunate part, is when it becomes apparent you guys will know it and you'll see it long before we say anything about it. We just think that's the best way to do it.

Okay. Alright, fair enough. That's helpful, thank you.

Thank you.

James Terwilliger, Duncan-Williams, Inc.

Hey guys, can you hear me?

We can.

We can.

Thank you very much.

Alright. First of all, very nice quarter. I only have one question and it's really based on inventories. Could you -- really, it's two questions on inventories. One, could you comment on inventory?

I know you've got a lot of new products, but the inventory level has been increasing on a sequential basis here in the last two quarters and the second question on inventories is could you provide some color and visibility into how you're going to handle the inventories when you transition with the EN Snare product at the end of the year?

Let me go to your first question on the EN Snare. We don't have any inventory. Part of some of the inventory levels is we're starting to build inventories because, essentially, on day one we have to be at full steam. So we didn't acquire any product. We acquired the intellectual property. We acquired the know-how and that sort of thing, but no inventory. So we're building inventory in preparation for that launch in January.

Another issue that we've seen and have discussed to some extent is that we have a number of vendors that made us a little bit nervous in as we saw some of these economic difficulties and so we have built inventories to make sure that we had plenty of rope, so to speak, to make sure that we didn't get ourselves in a bind. We have the inventory associated with the acquisition and that was the Alveolus. That was about $2.0 million, so that's a good portion of it.

But I think your comments are the same ones we had in our Audit Committee meeting and that is those inventories and building too much inventory and just explaining it off as "we're doing the best we can" is not adequate.

The other thing that really important is that when you start seeing this double-digit demand, in four or five new products and this sort of thing, you're going to have inventories for that. So I don't want talk out of both sides of my mouth. It's important. It's important for us to be able to have that cash rather than that inventory that has the risk of being obsolescence.

At the same time, we have to make sure that we have plenty of this product for the risk levels, the new products that are launching and particularly with things like Alveolus and our EN Snare. So that's my answer. Kent, do you want to weigh in on that?

I think you've said it pretty well. I mean, we did have a lot of increase for the acquisitions, mostly in the stent area. We have some in the probes and plastic stents and things and the raw materials to bring those into production and prep it. So you're sort of loaded up on both sides as you're trying to make this transition.

But we still added -- we can't escape the point that we've had some increase in inventories in our Richmond facility, for example. We've added quite a bit and it's to try and relieve backorders, customer service levels. So I think there's some improvement we can make in that area that you've probably noticed or why you're asking, but we aren't oblivious to it. We understand that.

Just to another point that Kent somewhat touched on. We bought this little business, the Hydromer business, that is the probes that are used in the GI market. And one of the things that we've seen in that area is that demand for that product under Merit's ownership has doubled and so it was doing about $1.5 million a year in that area and the demand has doubled. So we've had to build inventories and try to meet customer demands back in the transition plant back at Hydromer, while building the inventories and getting up.

And the report I had today is that we are up into production here. We're producing the product here and still producing the product back there, which we'll be able to do only for a couple more months, so that's another thing. You've got that Hydromer and that's doubled. And I think the reason it's doubled is the fact that we'll be able -- without trying to slight anybody, we've worked hard to make sure that we can meet the needs of our customers and previously, those weren't being met.

And so we're building product in two locations and it will all be here under one roof in 60 days. But please understand we're building the product today, but we're still building it at the other factory just to keep up with demand. I mean, what a problem -- I love these kind of problems!

It's a good problem to have, a growing top-line and a lot of new products, whether in-house or through acquisition. The only question I've got, though, is as you're building inventory on the EN Snare, is there a risk that there could be distributor-stocking on the EN Snare product as we get towards the end of the year?

Well, I think there's always that risk, but I don't know if you were on the front end of this call, but one of the things good things is that I think the two largest distributors that are with Angiotech, are Merit distributors that we've worked with for long periods of time. So there would be no need for them to do that, because they're not going to lose that value.

Is there some pipeline filling and is there the risk that there are some people that are taking that inventory and loading up with it or other salespeople motivated to sell it? I suppose that's always true, but I don't see, very candidly, that that's going to be disrupted. There are other reasons why I believe that.

I won't go into all of them, but one thing I should mention is that one of the components that goes into the EN Snare product Merit manufactures. So we have our thumb on this thing pretty closely.

Plus the royalties.

Plus, God bless them, because we get a substantial royalty on every one of those, so we're going to get it one way or the other.

Good answer. Congratulations on a nice quarter, guys, thank you.

Thanks, James.

(Operator Instructions) And I show no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Well, ladies and gentlemen, as you can see, the business continues to move forward. We have great new products. Again, for competitive reasons, we haven't discussed all of those, but there are some great things on the horizon. We have the momentum. We have the salesforce. We have the salesforce. We have great new technologies that will propel this Company forward for years to come.

We have a terrific staff and I want to commend everybody here who are asked not only to run the business, but to incorporate these other acquisitions and opportunities, and they've done a terrific job.

I'm excited about the opportunities. I'm excited about the markets and I think maybe the more important thing of all of this is I think we've structured a business that has sound principals, has no debt, has the ability to take and to spread the risk, both on the industrial side, on the direct hospital side and on the OEM side.

Merit is the place you go if you want to buy something OEM. Merit is who you call when you want convenience and safety. Merit is the company that's known for innovation in these areas where the technicians and physicians work every day. This is a terrific company and we hope than rather just use the words that we'll continue to be able to deliver the results, that we expect and we know that you expect.

So we thank you for your interest. We look forward to reporting to you in the future and we'll now sign off from Salt Lake City, wishing you a good evening and all the best. Good night.

Thank you. Ladies and gentlemen, that will concludes the Merit Medical Second Quarter Earnings Conference Call. Thank you for using ACT Conferencing. You may now disconnect.