Merit Medical Systems Inc (MMSI) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Merit Medical First Quarter 2010 Earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

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

Good afternoon, ladies and gentlemen. We're broadcasting from Salt Lake City where we're in the midst of springtime in the Rockies. We've had heavy snow most of the day and it's cold. I'm delighted that you would take the time and I'm pleased to be able to discuss with you today the results of our first quarter.

I'd like to start about first by having our General Counsel, Rashelle Perry, talk about our Safe Harbor provisions.

In the course of our discussion today, reference may be made to projections, anticipated events, or other information, which is not purely historical. Please be aware that statements made in this call, which are not purely historical, may be considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties, and other factors that could cause our actual results to differ materially from those anticipated in such statements. Many of these risks, events, uncertainties, and other factors are discussed in our annual report on Form 10-K and other reports and filings with the SEC, which are also available on our web site. To the extent any forward-looking statements are made in this call, such statements are made only as of today's date and we do not assume any obligation to update any such statements.

Rashelle, thank you very much. Ladies and gentlemen, I'm pleased to report the results of our first quarter. I'd like to start with a brief discussion of our revenues. Sales for the first quarter ended March 31 were $67.4 million, an increase of 16% over sales of $58.4 million for the first quarter. We beat our internal forecasts by approximately $2 million. Of note is the fact that sequentially, orders from a large OEM customer were down $2.8 million, and from the year-ago period, approximately $800,000. So when you I think look at this performance, particularly in light of the sequential results, that it's extraordinary.

Let me just discuss for a minute a little bit about why our revenues are improving and why we think they will improve going forward.

First of all, one of the products that we introduced was our EN Snare product. You will recall that our initial forecast was approximately -- or, excuse me, $5.8 million. In our conference call in January, early February, we discussed that number was now ramping at approximately and moved that up to about $7.8 million. We are currently ramping as of the sales for the first quarter at $8.4 million. And we believe that this product has the potential to produce revenues in the $9 million to $10 million range this year based on that ramp.

I think we've been extraordinarily successful at not only converting the existing accounts that we're using the product in the best-of-class area here, but also of taking market share away from some of our competitors in, again, in what we believe is the best-of-class product.

We are also producing this product at at least 80% gross margins. And a good portion of the increase sequentially in our gross margins -- we think in the range of 90 basis points -- came from the production of this product. So it's being produced in Ireland and our guys have done a terrific job. Our sales force has done a terrific job.

There are other, I think, really important things going on in the marketplace. And for years and years, many of you have heard me talk about Merit getting stronger and our competitors getting weaker. The fact of the matter is is I've never seen that statement more true than today and, in fact, accelerating. There are major disruptions in the marketplace with a number of our competitors and we've been able to book new business, 10, 20, 30 accounts, of products where one of our major competitors is having difficulty delivering product for several reasons that we're aware of and I'm sure several that we're not. But that business is accelerating.

I'm pleased to announce that earlier today we received a notification from the Food and Drug Administration in terms of our 510(k) approval regarding a new product that we call the [Tram]. This is a manifold system that has an integral transducer and a product that we think will I think accelerate, again, sales in this particular where we're seeing the weakness from our competitors.

Of also I think of interest is the fact that we're the only company in the world that produces essentially all of the components, including the pressure sensor. Merit is now producing and incorporating our own pressure sensor in all of our pressure transducers, or at least we're ramping that direction. And the Tram has the new Merit pressure transducer incorporated into that product.

So if we look at all of the various areas across our sales organization, we see that our direct sales in Europe are up 26%. We take OEM and we X out the OEM customer, we're up 15%. In Japan, we're up almost 40%. Our US direct sales force, which represents the largest single portion of our sales, is up 16%, worldwide dealers, and so on and so forth. So we're seeing strength across the board in our sales efforts.

Let me move if I could then now to the net income. Now the net income for the first quarter was $4.5 million or $0.16 per share compared to $5.5 million or $0.19 for the first quarter last year. One of the things I'd like to is to have some discussion for a moment and talk about some of those things that are affecting our earnings and gross margins.

As I mentioned previously, our gross margins for the first quarter of 2010 were 42.2%. Now that compares with 42.5% last year, but I think the most important thing is not to look back a year, although that's what we do here is compare, but to really look back to the fourth quarter. And you'll all appreciate that we had the issues of production going on and a slowdown, but as you can see from this, we clearly have bounced back, our gross margins being now 42.2% versus 40.5% for that fourth quarter.

A few hours ago, I was sitting with my production staff and my chief operating officer and my vice president of operations and engineering. And they discussed with me the fact that they felt -- in fact, a statement was made that we've never been busier. We're busy. We're very busy. And you'll notice that one of the comments that we make in our press release today is that we believe that the near-term production levels will not be in terms of negative variances. In fact, we believe and we have hope that what we'll do is to see that we'll start to generate positive variances going forward. And that comes from the fact that we're working overtime, we have a bigger backlog than what we had in the previous months. And in fact, in March -- I think this is correct, Greg -- that we had the first positive variance since last September, which means that we're absorbing up those costs. And as business accelerates going forward that we hope to generate positive variances. And helps to alleviate the kind of situation we saw last year.

Now I think also really important to all of this conversation is the fact that our inventory was slightly down. And when you think about, you know, we can talk about numbers, we can talk about percentages and sales, but when you can grow a business 16%, when you can introduce four or five new products and reduce your inventory, it's an extraordinary effort. Of course, that helps our balance sheet, our cash balances. It helps with future negatives that you could have like obsolescence. But we're simply holding the line, doing a better job while we have all of this demand coming upon up and while we're introducing these new products. And I think that's an extraordinary effort on behalf of our operations team.

Let me discuss with you some of the new products that are coming down the pike that helped us support what we believe will be a strong revenue stream going forward. As I had mentioned previously, the EN Snare has been launched. The Laureate hydrophilic guide wire, this is the project that we have talked about previously. We have spent three our four years on this project. We believe that this is the project that has an opportunity to be $30 million or $40 million. We're producing it in Ireland. And so one of the things that we hope to see in the future is continued opportunities as we're taxed at lower rates in Ireland. We're also operating at positive variances in Ireland. And as we add more volume upon that, it just simply means more profits. And so we're very excited about that. We just started making our very first shipments just this week of the Laureate and we'll start to accelerate that, particularly as we move into the mid May month.

We have not announced this previously, but we have received 510(k) for the Impress hydrophilic catheter. And this is a catheter line of radiology selective and nonselective catheters with a hydrophilic coating on it. Of course, the advantage for us and for the patient is that we get about 3X for this product over our standard price and we're very excited about what this means. It's at our central - same point of sale as our radiology line, which includes the EN Snare and the Laureate.

We have also finished this last week in Europe a trial of our [Finale] radial artery compression device. And one of the things that's very exciting about this product is that we had great success with it competing against and I think I can say with you - to you with confidence that we feel like this product is equal to or better than the competition.

The exciting part about it is in the world of interventional cardiology, maybe the most talked about thing that's going on there in our business is radial artery procedures. And many of you are already aware that in Europe, some countries do as much as 80%. But the numbers I've heard are clearly somewhere around 40% or 50% of procedures being done are being done by radial artery access.

In the United States, it's less than 5%. But with the early ambulation and lower cost of a radial artery procedure, we believe that this is going to be maybe the fastest-growing segment of vascular access for Merit in the future. It's an exciting product with this adjunct product that is patented that's going to help to support that product and we believe and we have evidence we believe where we're starting to see more training shows, more dialogue at the ACC and other types of cardiology meetings where a lot of physicians are becoming interested in this procedure simply because of the ability to ambulate your patients. So in these cases, you don't have to use a closure device that you might use, for instance, if you used the femoral approach. That alone could be $250. You can get a patient out of the hospital much quicker. And you don't have to worry about the kinds of issues of pseudo-aneurisms and hematomas that you might have to deal with if you were dealing with femoral access, which is as I mentioned the majority of the cases done in the United States.

It is safer and more comfortable. And, anyway, there's a lot of reasons why we're excited about that. And I think maybe to top that off, I think Merit's product is believed to be the best product in the field. We compete with Terumo there, who is a good competitor. But from the people that I talk to -- these are physicians -- they prefer our product over theirs. And it's the fastest growing part of our vascular access business in terms of volume in that area.

Now we also are - have launched our Maestro microcatheter. And, again, we're getting a lot of play out of that. We also have a new catalog item that we'll introduce at the end of the month and -- or, excuse me, end of May. And we believe that, again, that's at that same point of sale that we talked about with the EN Snare, with the Laureate. So when we look at all of those products, we have our guys really having a kind of a field day out there.

In fact, you know, I had a conversation with one of our sales -- excuse me -- one of our salespeople recently. And this is a guy that's been with us for 15 years. And one of the things that he mentioned was how excited he was to be out in the field and to be able to go shoulder to shoulder with the big boys as he put it and walk in with world-class products, with higher-priced products, which are higher-margin products for Merit, and how his overall attitude and morale was just because of having these great best-in-class products in his bag. And that's exciting.

Now I would like to move on now for a moment and talk about the SG&A expenses, because as you can see, the SG&A costs are higher than I think many of you have modeled. But I'd like to go through them for a minute and explain some one-time expenses and some ongoing expenses and particularly as we compare them against the first quarter of last year.

And as you can see, the SG&A expenses were 28.2% of sales as compared to 25.4%. The first thing that needs to be discussed is the fact that if you look back a year ago, we only had the SG&A expense for the Alveolus acquisition for about two weeks. This year we have the entire expense of the period, which is about $1 million. And so it's something, make sure that you guys all understand that.

Secondly, there was a settlement of a legal issue. That's a one-time expense in the quarter. It was $477,000. I'm not going to talk any more about that because of confidentiality agreements, but it's just a period charge.

I'd like to also talk about our West Jordan facility. One of the concerns or one of the things that was raised last - or a couple of years ago is when we had to face the effects of Hurricane Ike. Although we did not get hit directly, we were on the periphery of the storm. And it caused us to be in a position to be essentially out of business almost a month with a cost of several hundred thousand dollars. Despite the fact that we I think were able to maintain almost all of our business, I think what it did for me is to say I couldn't put the company's fastest-growing area in - at jeopardy any longer. These are things like our MAKs, our SMAKs, all of our ReSolve catheters, our pericardiocentesis catheters, the RNLs, the One-Step. So these are all really important products.

And so what we decided to do was to take that part of the business and move it to Salt Lake City. So we leased a facility nearby, about two miles from here. And we have built clean rooms. We are in the process of moving that business here and qualifying it. When I say moving it, what we're doing is we're duplicating it. And we'll be up and running and producing that product here before we shut down the facility or that part of it in Texas. Now that means that the costs of the facility have to be put - until it's in full production and producing has to be put in as a one-time charge in the SG&A section. So there's a charge of that in the quarter of $189,000, almost $200,000, just a period expense. And so that's another important thing for you to understand.

Another part that's very important for you to understand is that - is China and what we're doing in China. Right now, we sell through a distributor. And China has been one of our fastest-growing markets for several years. The challenge has been that only about 20% of our product line is being sold there. So we made a decision over a year ago in which we decided that what we would do is we essentially would become the importer. So we have set up our own office in Beijing. We have five employees. We'll have probably when we're all said and done probably eight or nine. And we have our own warehouse. So we are working through the process of getting our corporate approval, as well as our regulatory approvals. Later on this year, probably in the fourth quarter, we will have products being shipped from Salt Lake City to Beijing. And then we will work through the distribution channels there. I believe that if we were to look down the road 10 years, 15 years, that it represents a $100 million opportunity for Merit. But we would never get there if we weren't making these investments. And so we have the expense with essentially no revenue. And so that's in this SG&A. Now it'll be ongoing, but the advantage is this. As we approach later this year and into next year, the price that we get for our products is almost double of what the price is today because we become the importer, we distribute and control what's going on in China. And we think that that's very important.

And so as you can see from our discussion here, we're talking about China. We've talked about Endotek. We've talked about our facilities in West Jordan. And we're getting a little bit more active let's say in some of the trade shows. And I think we're doing a much better job going out and doing our clinical trials, which means that we're not going to be start, stop, start, stop in terms of our products. But we're doing our homework. I think we're doing a better job than we've ever done to make sure that our products will meet the needs of our customers.

But there's a cost to that. But I believe at the end of the day, what we're going to see is accelerating revenues and our ability to take care of the opportunities and candidly the shortcomings of some of our competitors. And I really wish I could talk more about that and some of those issues, but it's for them chronic. It's a big problem and it's a great opportunity for Merit.

Let me move on if I could now and discuss our research and development costs, up to 4.5% of sales. There are a number of new products that, of course, that we continue to work on. But another primary is that we have opened a research and development facility in Addison, Texas, just outside of Dallas. Let me briefly explain that.

With the Alveolus deal, there were two or three great engineers that we felt were necessary to protect the existing business, to produce new products. And so what we did is we set up -- and I think we've discussed this before -- a small -- I think it's 5,000 square feet, so not - it's not a huge facility. And there's three people there, three engineers. But they're designing not only new nonvascular stents, but we're preparing to start on our first novel vascular stent. We think we have - we're working with a physician who has a great idea who is a luminary in interventional radiology. And we're working and starting a project there. Had we not had that capability and that stent capability in those guys, we couldn't do that. But as we looked down the road in the business and as you can see from the way our business is changing, we are going to be in various types of stents, various types of vascular devices and microcatheters and things that have higher value to us, to physicians, and to patients. And we have I think moved in that direction over the last couple of years, but they do take investment.

So as you look at these things, we hope that you'll consider some of those one-time events and some of those things, which were essentially not quite even. And I'm talking particularly about the Endotek and the full quarter versus a couple of weeks. Again, I am not looking at what your numbers are in terms of our sales. But in our own internal numbers, we are up a couple of million dollars.

Kent, you'd like to add something.

Well, just also that a lot of these investments are - added people and salespeople in Europe and in the US. And we've seen some of the results of that. You're seeing the growth rates accelerate as we get a return on that investment I suppose in the sense of higher volumes of sales, particularly in some of the new countries where Germany, Sweden, Austria, Ireland, are all seeing big growth because of recent increases by adding people there.

Yes, as an example, I think Germany is up approximately 25% this year if we take a look, and that's with a falling euro, so it's even when we were looking at higher numbers. But that's a significant deal. I think in the United Kingdom we're up over 20% this year. In France we're up. So we're - across the board business is strong and very candidly getting stronger every day. And so we feel good about our business. We're trying to explain the things that are in place that are needed to be there to support the growth going forward. It's an extraordinary time, the most extraordinary time in our corporate history. I've never seen a time like this when there's been so much opportunity and where we candidly are better prepared than we ever have been before. We have facilities, we have support, sales, marketing -- we have all of the pieces I think of the puzzle to help us build our business.

Let's talk about the groups for a minute. If we take a look at the first quarter of this year versus last year, catheter sales grew 21%. Now let's think about this for a second. If we take a look at procedures, some would argue that interventional procedures are flat. I've heard 3%, 5%. Pick a number. It's not 21%. If we take a look at standalone devices, now you'll recall that standalone devices are all of our single catalog items that are often put together in a kit -- up 19%. So what's going on here? How do things grow at those kinds of levels when we know procedure rates aren't growing? And here's the answer. We're taking market share, we're getting broader geographical support across the board, and we're introducing new products that other people don't have.

Let's take a look at inflation devices. There's an interesting one. It's essentially flat. But if we take a look at the real numbers, our inflation devices sales, which is the most mature product we have, are up 6%. And it's, in fact, the largest increase in seven quarters. What's going on there? Well, again, I would argue that our representation, our capabilities, the breadth of product line, and the fact that we pay attention to the opportunities.

We're going to add two new inflation devices this year. One is just ramping up now. That's the Blue Diamond. It is best-in-class. And then later on this year, the [Basics Big]. I think that might be a new name for you. But this is a new inflation device for peripherals and for esophageal balloons. We're very excited about the opportunities there.

Kits and trays, 12%. Now I can tell you that if you look in the quarters coming down the road, it's going to be more than 12%. I can say that with confidence. How do I know that? Because we've picked up this quarter that we're just starting to fill the pipeline with hundreds, thousands of new kits, thousands of new kits. Our competitors just simply can't deliver the product. They're having struggles. Thousands of new kits. That helps to of course lower our unit costs across the board. So we're excited about what's going on there. The Tram is certainly going to be a big part of that. There are lots of other areas there. But the kit and tray business is going to accelerate in growth as we go down the road. There's no doubt in my mind about that.

Now I'm going to let Kent for second talk about the tax rates and give a little explanation on tax rates. Kent?

Hey, you've already introduced the major issues really with the EN Snare production and the profitability of that and even expected maybe more with the Laureate. And even some of the volumes in our contract business that Ireland builds for the US sales and distribution, we've seen increases in productivity, positive variances.

So the bottom line, there's more profit in Ireland. We continue to have advantages here, for example, of an R&D tax credit that's increasing again this year for Utah. And you put it all together, hopefully we get an R&D credit out of the US government someday. And all will help us lower our tax rate. It was actually below what we expected this quarter at just about - just lower than 29%. So we're - it's a good progress, a good trend.

Well, I appreciate it. Thank you, Kent.

Just a couple more items and then we'll open it up to questions. A couple of issues on the FX issue, the FX improved our sales volume by $233,000, but because of the cost of it on the other side, it decreased or we had unfavorable expense, but it about netted each other out. It was a relatively small amount, but it did affect gross margins by about 20 BPS. So it's almost a neutral, a little bit to the downside in terms of the cost to Merit.

Another thing that is something that we have our eye on and something that I think is important for us to understand and for you to understand and that is that in this first quarter, our estimate of increased input costs relative were about $200,000. We also will see at least based on our pricing that we're receiving essentially starting May 1 an additional increase of $250,000 in increased input cost due to the cost of resins. So these are input costs that are already in that first quarter. We're going to have a little bit more of that cost going forward just simply because we see this oil.

And as you all have seen recently, you've seen kind of a pullback on inventories. They've drawn down on inventories. And we're going through what some perceive to be an economic recovery to whatever extent that is. But we've seen these oil prices sitting up here in the $80 to $85. Now I haven't looked at them today. I looked at them yesterday and they were down a couple of bucks. But that's kind of - that is something that does affect our business. It does affect our margins. So it's a headwind so to speak.

I believe that with the positive things on the revenue side that as, again, those unit costs are going to help us to be able to move forward in our business and grow our revenues.

Now we're not prepared today to - we've talked all the time about revenues and we've talked about and you guys have our numbers. Our general belief is and we're not prepared to talk about increasing the top line or increasing or decreasing anything. What we will do is we'll continue to monitor this. And as we see the weeks or months ahead if there's an adjustment up or down or whatever, we will come back and talk to you about that.

We're not prepared to do that today, even though we saw this increase over our own internal forecasts of $200,000. And you see from the earnings side some of these expenses. I think more than anything we have the horses in place. We have the foot soldiers out there to take advantage of the opportunities that we think exist and are, in fact, presenting themselves, as I mentioned.

And I'll close by saying the opportunities we have talked about for many years and for many quarter have, in fact, presented themselves to Merit to take advantage of. And we have the product line, we have the capability, the capacity, and the sales force to do that. And I believe that it's an exciting time for us.

So I think that pretty well wraps it up. I know I'm going to get asked about acquisitions and opportunities and so let me just simply address it that we continue to see great opportunities out there, both on the distribution side and other side. And we carefully and cautiously look at the opportunities that we think would fit well for Merit. And we are having those ongoing discussions. I think I have this conversation every time we meet and I'm sure I'll be asked the question, so there's the answer.

That being said, I think I will go ahead now and turn the time over to you and we'll start taking some questions. Thank you very much.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Eric Criscuolo with Thomas Weisel Partners. Please go ahead.

Good afternoon, guys. Thank you for taking my questions. (Inaudible). I guess first off on the gross margins, I know that last quarter you said that you're kind of thinking that 100 basis points improvement year over year is what you're targeting. So with everything you're seeing now with where they ended up, how confident are you that you can hit that target?

Well, as I mentioned in the conversation with the EN Snare accelerating and adding gross margins there, that's a big factor. With I think more sales going forward, what I - let me say more sales, well, actually the acceleration opportunity, I think there's a good opportunity to do that. The other side of the coin is I don't know what all of those other headwinds are, like I said, when you start adding a couple hundred thousand for resins and this and that. So I don't have any reason to doubt that we can do that at this point, but there are two sides to that. And that was our estimate at the end of the year. And that was, by the way, one of the positive factors to address this question was on the point that I made if you were on the line and discussed this issue of negative variances. So what we're starting to do now and what we hope we'll be able to do going forward is to create positive variances, work all of those negatives that I think are almost through the system -- we've got a little bit more to go, but it's almost all out of there. So with this acceleration and this busyness that we see, we should start to see positive variances, which will positively affect the gross margins going forward. So I'm reasonably confident we should be able to do that. And, in fact, if we look back, for the last three or four years we've been able to do that. So I'm still reasonably confident we can do that.

Okay, thanks for that color.

You bet.

And on the European side of things, given all of the issues with credit they're having there and throughout the various countries, anything that's kind of concerning you right now as far as accounts maybe not paying or if you have to increase reserves against that?

No, we've not seen that. I mean, I was asked the question independently today during an audit committee meeting is are we seeing any effect let's say in Greece and Spain? Spain is our largest standalone distributor in Europe and we have not seen any difficulty in collecting. We saw more of it a couple of years ago. I - when we started to see a meltdown in the financial markets a couple of years ago, I was more concerned then. But we are not seeing -- in fact, I think all evidence to the contrary. Sales are up 26% when we take a look at our direct sales business over there. And even our dealers, right, the European direct, they're up, hold on here.

No, they're down.

Yes, they are down -- they're down a little bit, so European dealers are down a little bit. So on the sales side, we are seeing some effect there. But the bright part of it is that our business direct is much larger and that's up 26%. So when we're working directly with our customers there, so we've gone direct in Finland, Sweden, Norway, Austria, those distributors are gone and they're now full-time working directly with the hospitals. So in some ways, that mitigates that risk.

Okay, great. And just lastly, it looks like just quickly going through it, standalone device is up I think 19% in the quarter. We were almost -- we had almost 10% on our estimate. So what was driving the growth there?

Well, I think the EN Snare is in that group, so that's going to be part of it. And then one of the problems that we saw with a competitor is they were having difficulty delivering kits and so we were delivering a lot of standalone products that we could deliver overnight. So, I mean, if I could, you'd be able to - in a kit, you're going to get a manifold, tubing, syringes, guide wires, that sort of thing. On a standalone basis, all of those products Merit sells on a standalone one-up basis. And when those guys started having delivery getting product -- and let me just say I - one of the largest hospitals in New York didn't have product to do a procedure, literally did not have product with patient's coming to be on the table in the morning. Merit was able to take and ship product, but they were one-ups, and so they had to assemble them, but we saved their bacon. And they were able to go out and do those procedures for those patients. So having this standalone business and the breadth of that market is a big thing for us to sell on both standalone and in a kit because we can respond -- even when we make a mistake, we -- and we do from time to time, we have the ability to get product to the customer overnight almost on any basis, so that - that's another part that's driving the standalone business.

A couple other products, the infuser bags are up 32% from the year-ago quarter, needles are up 36%, torque devices are up 28%, so we've had a few other products get some strength in here.

I mean, and when we're talking about infusion bags, 32%, this is a product that's still in $3 million or $4 million, so that's a pretty significant increase. And, again, that has to do with a lack of focus on behalf of one of our major competitors. That's another competitor that we haven't talked about a lot in the past because it's kind of a unique product, but 32% needles has to do both with an OEM opportunity that we're working on and just the fact that Merit believes we have the best needle on the planet. Sounds a little insignificant, but you'd be amazed at what one little product can do. So that's our best answer.

Okay, I appreciate the commentary. Thanks a lot.

You bet.

Thank you. Our next question comes from the line of James Sidoti with Sidoti & Company. Please go ahead.

Good afternoon, Fred. Good afternoon, Kent.

Yes.

Hey, Jimmy, how are you?

Good, good. I'm sorry, I missed the first five minutes or so of the call. Did you break out the Endotek sales in the quarter?

You know, we did not, but I've got it right here. Or Kent, do you have it?

Yes, I got it right here.

Go ahead, Kent.

That group, $1.8 million roughly. Sorry, sorry, $2.4 million, the increase was $1.8 million over our (inaudible).

Yes, so $2.4 million, which I ought to mention, is just short of $10 million on a ramp basis. And I think our forecast, our internal forecast, was $8 million. So it's ramping up substantially higher than our forecast that we built in.

Probes had a big help in that, too.

Yes, yes, but it's that whole GI market.

And did you break out the EN Snare sales?

Yes, we did. We talked about it. Jim, as you'll recall, I think our initial number was $5.8 million. We then moved it up to $7.8 million, added a couple of million. We're now ramping as of the first quarter at $8.4 million. And I said that I thought that we're going to have a product that's going to end up somewhere between $9 million and $10 million, which is really extraordinary.

So it was a little over $2.1 million to answer your question for the quarter.

All right, so between the two, you expect to add $20 million almost.

Yes, a little short of that because we only have three quarters of Endotek. We are going to have a full year. That's true.

Yes, no, no, no.

Pretty close, isn't it?

Endotek's going to be there for the rest. This is the one quarter where you have a big delta for the difference.

Oh, you're right.

That's right. Endotek was there last year, for the last three quarters.

Right. But between those two lines, you'll have about $20 million in revenue?

That's correct.

Oh, I see, yes.

That's correct.

Okay. All right. And then on the SG&A, I don't want to beat it to death, but as we look to - going through the year, I mean, I imagine that you had about $600,000 of one-time expenses or maybe a little more, so maybe $700,000 in one-time expenses. We should expect that to come back, right?

That's correct.

(Inaudible) and the move to Salt Lake.

That's correct.

Now those other costs are kind of like they're still there.

They are.

How long do you think before the top line catches up with them?

You mean are we going to get back to a normalized rate of 23% that we've had I think historically?

Yes.

And the answer is I don't think we'll get there. And I'll tell you why. I think we - our goal would be to be in the 25% to 26% range. Here's why. These great products and more sophisticated products, you have to have more -- what am I looking for here -- clinical personnel. You have to have more samples. And that's another thing.

(Inaudible).

One of the things, by the way, I'm glad you raised this. One of the other things in this SG&A cost issue was in this first quarter where we were getting ready to launch these products and we were doing [MRTs], we spent a lot of money because we had to get people in the field, we had people in Europe, we had, for instance, with one of our wire products, we had somebody out spending samples in this for almost a month to make sure that we did a broad enough testing of our product. So that's kind of a quarter expense. We don't -- I don't think in the -- at least as I look into the second quarter, I don't see those type of expenses because we're not running that many trials. We were running four different trials in the first quarter. So that will pull back a bit, both on travel, both on samples and that sort of thing.

Okay, so do you think you get back to that 25%?

I think 25.5%, maybe a little higher than that, is about where we'll be. Our business is changing. Again, it requires a little bit --

Takes some good revenue growth, too, to absorb that.

Yes. And it will take good revenue growth. But we think we can do that.

Okay, all right, thank you.

You bet. Thanks Jim.

Thank you. (Operator Instructions). And our next question comes from the line of Jayson Bedford with Raymond James. Please go ahead.

Hi, good afternoon, guys.

Hey Jayson, how are you?

Doing well, thanks.

Good to hear your voice. Good to hear your voice.

Thank you. Yours, too, Fred.

Thank you.

I jumped on a little late, so I apologize if some of these questions are redundant.

Hey, what's with everybody's jumping on late and stuff? I wasn't late. What are you guys doing?

Well, you guys have got to report a little earlier and then you won't get lumped in with all of these others.

Okay.

But --

You chose somebody over me, Jim? Or, I mean, whatever your name is? Old what's his name? Go -- I'm sorry, I'm done having fun with you. Go ahead, fire them away.

Okay. Gross margin, I think you said 42.6% in January. You did 42.2% for the full quarter. I'm guessing, you know, I thought you were kind of fighting through some of that high-cost inventory. I'm just wondering kind of when does that reverse and when can you see that trend start going higher?

Yes, we talked about - there's a couple of things. We talked about we had some input costs of about $200,000 of increased resin costs in the first quarter. We talked about we're still working through those negative variances. I mentioned that in the month of March, we had the first positive variance from manufacturing since September. I mentioned that we're very, very busy. We have a little bit more stuff to push through, but my expectation is that we'll see positive variances as we move forward the balance of the year. We're just simply very, very busy.

Okay. So this is a number, the 42.2% is a number you'd expect to build on going forward?

That's my hope.

Okay. And then on the R&D side, I guess specifically with respect to the reflux valve that you're looking at, have you decided to go forward with a trial for that? And is that kind of assumed in your guidance?

Yes, I'm glad you asked this question. First of all, as you know, we do not have FDA approval in the United States for that product. What we do have is we do have the CE Mark. And we, in fact, did a trial and we have several more that are coming up, but we did a trial in the Netherlands maybe two to three weeks ago. In that trial, the patient had an improvement as he pointed out, for the first time in years he didn't have excruciating pain. What happened is because of the size of the anatomy, it wasn't the ideal size for him. But it stayed in place for four or five days. He went home. I got a call the other day. He wants to come back in and put another one in. He said it's such a vast difference. So we're working on the sizes. We're also working on a unique stent that will incorporate - this is Merit's own stent. This valve that I'm talking about, the case, involved us putting a stent essentially within a stent. Our new product that we hope eventually to get to would be our own valve in our own stent sized specifically to deliver that. And so I continue to believe that this is a great opportunity for Merit and that we will continue to pursue this.

And, Fred, when do you make kind of the go/no-go decision on that one?

Well, I think - it's a good question. We need to do more trials. And we need to I think believe on our own stent that we can deliver it into somebody else's stent. So I don't - I think the real key to it will be that we can keep them and they don't migrate. I think ultimately, though, in order to do that, we're going to have to have the valve within our own stent. That's what it's going to take. And we're probably 9 to 12 months away from having that capability. So it's down the road, Jayson, not in this year, although we hope that we will able - be able to do some trials, we'll be able to do those in Europe, because we should have a CE Mark and have -- we already have the CE Mark on the valve -- much sooner, of course, than we'd have FDA approval. So it's going to be later on this year before we can discuss, but it really is later on this year is probably the best way I can answer is sometime probably in the third or fourth quarter as we're able to take and incorporate it together. But I can tell you that just based on this case of one that it was a significant issue. It didn't deteriorate, it didn't deform. It just wasn't sized right for the patient. But in that short period of time, the guy is calling and wants to come back in and have one put back in again. I think that's astounding, so.

Sure, okay, that's helpful.

But it's a sample of one.

Okay. And then on the SG&A side, did you add any reps in the quarter? And then can you just remind us?

Yes, I think - and, Kent, I think we have been - one of the things that you'll recall is that we talked about, well Merit's product line, as you know, Jayson, is very broad and diverse. And one of the things that we started working on several years ago was kind of starting to divide the bag so we could drill down. And let me give you some support for that.

Kent just mentioned a few minutes ago that our pressure infuser product is up 32% for the quarter. That's being sold by these guys that are doing what we call our procedures. You heard me mention that we've added thousands and thousands of kits and - because of the inability of one of our competitors. And that's being sold by these split bags. I think the number was that we added 12. Is that correct, Kent?

Yes, we added 12 sales and marketing people. And most of those were reps [who] were splitting bags. So we're adding a new territory and (inaudible) --

So we're splitting it.

Yes. So we split a bag [when we won] an open territory.

Yes, and those were new in the quarter or came on --

In the last year..

-- in the last year, so we've added 12 new salespeople in the last year. So we continue to do it when a territory or an opportunity -- and I'll tell you this. We have a number of other territories that we're looking at. We're having discussions about whether we should take and expand other areas where maybe our sales force or our - we have a - maybe one salesperson who's got too big of a territory. So we'll continue to do that when it's timely to do so.

Okay, that sounds good. I'll jump off and let others jump in.

Okay, great. Nice to hear your voice, Jayson.

Thanks Fred.

Thank you. Your next question comes from the line of Dave Turkaly with SIG. Please go ahead.

Hey thanks. Just to be clear, I know you mentioned that you didn't really want to change anything, but I guess is that - should we take this as a reiteration of the EPS range that you guys had heading into today?

Well, I hope not. That's not my purpose. My hope is without -- I'm trying to explain the expenses that we had and trying to tell you that we beat our forecast $2 million. But until I can work and work out my own model and have better evidence of what's going forward, we're not going to change it. We're not on one quarter not going to go and change up on the up side. But I suppose you make a very good point. You're seeing the revenues that may or may not be where you are, but they're $2 million internally ahead, but you're seeing these expenses. And the question that has to be asked for everybody is are they going to be able to accelerate those expenses to absorb - those revenues to absorb those expenses. And what I've said is I'm not changing the earnings per share down. I'm keeping everything the same. And I believe that - and my hope is that we're going to be able to make sure that we can absorb those expenses with higher sales. That's the hope.

And I believe that based on the $2 million above our internal forecast that that's the opportunity to do so. That's where we are today. And we think it's too early to start jumping around with only one quarter done, and especially when we're seeing the acceleration of revenues. So that's the thing that the momentum here is what's going is we're seeing so much opportunity, for the first time, as I mentioned, the positive variances in March in manufacturing, we're working overtime to keep up with the demand because we have so much of it. So all of these things tell me that we're going to see higher revenues and we should be able to absorb those. So you can make your own call on it. That's what you guys get paid to do. But I'm not prepared to move it one way or the other until I have more evidence that I either can absorb or I can or this and that. It's just too early in the year to take a whole year and then try to prognosticate it on a quarter. Now that's what you guys do.

And I appreciate that --

And I'll tell you this. And whichever way you, you know, I'm going to try to prove that I can outsell you. If you want to go the other way, I'm going to do every damn thing I can to make you wrong. So you go ahead, do whatever you want to do.

Oh, I appreciate that and all of the detail has been fantastic, too, I think. And I guess without explicitly saying it, by saying we're not changing anything, I read it as implicitly sort of a reiteration. If we look at these things, tax rate, I know you mentioned great progress in the quarter, you know, should we be thinking low 30s for the year, 31%, 30%, I don't know?

And that, we're starting to think that might be [become] --

Yeah, and that's different from what we said in the past. But we need another quarter. We need to see this stuff. We need to see the Laureate. We need to make sure that we have all of our transfer pricing right. When you start making a lot of money as an example, we're sitting back here in October or we give our numbers and we're working our forecasts and we come up with an effective tax rate. Well, we're at $5.8 million for the EN Snare, all of a sudden we're saying well, wait a second. This is as good or better than we thought it was going to be. And so we were a little conservative. Well now we're talking about well, maybe - it's ramping at $8.5 million through the first quarter. Could it make $9 million or $10 million for the year? It might. And if it does, what does that mean in terms of transfer pricing and particularly when we've got all of the bloodhounds with their hands out looking for money. So we're not going to change our tax rate yet because we have to look at our transfer pricing and make sure that we're doing things correctly so we can all stay out of jail. We're trying to do the right thing. So - but I'm not going to tell you, you saw 28%. We said what, 33% for the year?

Yes.

That's 500 basis points. So you hit the nail on the head.

It's probably going to be lower than 33%.

Yes. And we think it has a chance of being lower than 33%. That helps our earnings per share based on the model. But it's just too early. We need another, maybe this quarter, as we get through that, then I think we have six months. And that's probably appropriate at that point in time to say okay, guys, based on all of this stuff in six months and this acceleration and the acceptance of these new products, or maybe a product's a dud. Then I think we can say here it is. And I think at that point, we'd evaluate it and say something. But it's just too early now.

Fred, come on. We all know Merit Medical has never had a dud.

Oh, yes, well, wait a second. Yes, we have. They're called Fred's follies and there's a few of them around. That's all they ever talk about around here. They never talk about those great things.

The - yes, so now I appreciate this. Obviously every company has a lot of things to consider when they're looking at what the - how the year could turn out. And you guys do and you have a lot of moving parts this year. I guess what I just trying to get at, again, is if your margins are where they are and you're going to grow a bit and your tax rate goes down, yes, you have a chance to absorb them, I think that's probably what people would like to hear that certainly this quarter might've been given where you're starting from, you might be able to still show incremental upside on the bottom line moving throughout this year if those other things happen and your tax rate falls.

Yes, we - one other thing, too, is we take a look, for instance, at moving some of our catheter production. That's going to help us make more money with higher margins and lower costs. It's not just weather. There were a lot of other factors associated with that. But until it's up and running and absorbing and we can say we did this and here's the result, I don't want to start promising that stuff. But we're going to make more money on those products, building them here in Utah, than we are in Texas. That's just the facts. So that's going to affect us positively. But we're not going to be up and running full and have that duplication done until June and then ramping it up over the year. And as we do that, it's going to have a very positive effect on our business. But those are so esoteric, it's hard for me to promise something, but that's what my expectation is, by the way. And other than just saying the weather factor and the expense, we haven't talked about the upside. The upside is substantial just in something - especially in the fastest-growing part of our business.

No, I appreciate it. And I think I'll stop there. Thanks a lot.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Shawn Fitz with Stephens, Incorporated. Please go ahead.

Hey Fred and Kent. Thanks for working me in. Just a quick question, Fred, thinking about margins and maybe not specifics obviously, but just trying to kind of think about when something might start to manifest itself in a meaningful way in your P&L. You guys have obviously put a lot of new products in the ditty bag of your sales force with some very attractive margins. Could you kind of help us understand just in terms of when those might start to really manifest themselves in your gross margin profile?

Yes, well, clearly the EN Snare is already doing that. I think the product that - and I think we've said that it's 80 to 90 basis points we believe in the first quarter, probably going to end up by the time we get through the year maybe at closer to maybe possibly at 100, 110 BPS just on that alone if we continue to grow it and get more efficient.

I think the product that has the most potential of affecting our gross margins is our Laureate guide wire. We believe that we have the best hydrophilic guide wire on the planet. And we believe -- I believe, so this is me speaking -- that that has an opportunity of $30 million to $50 million. Now is that this year, next year? No. But we think we can ramp it there. It's that powerful. It's in Ireland at a lower tax rate. It's been essentially an R&D expense at this point, now just starting to go into -- and that's another reason why that R&D is up there because it's been R&D. It's now just starting to go in and get absorbed up. As that volume moves up, we believe that we can produce that product that will give us in excess of a 50% to 60% gross margin. It would be almost like having an inflation device business again. I mean, it's that big of an opportunity for us.

So it's going to take the balance of this year to ramp it. It's going to take next year as it grows. But I - we're going to be talking about that product for a very, very long time. I believe, Shawn, that it's going to - when we were talking about something like our Prelude sheath business, which we're selling 70,000 units a month, it's taken us five or six years to get there. This product is going to ramp much faster than our sheath business, much faster. So I think that's the product that has the product that has the biggest opportunity to really kind of knock the socks or knock the cover off the ball.

Okay, thanks Fred. And then just thinking about China, obviously that's an enormous opportunity for Merit. You expressed a lot of confidence and optimism in terms of the opportunity there. Could you help us understand when you all are going to be able to get a bigger chunk of your product portfolio into that marketplace?

Well, first of all, it's - China is already a great opportunity. If we were to take a look at the fastest-growing areas of our business over the last several years, it would be China. It's also the most bureaucratic and may be the most difficult place to do business. As I mentioned earlier in the call, we're going to have to almost nine people on the ground just when you open your office up. And we have five or six of those right now and the office is being fitted out. And then we have all of the issues that are associated and the expenses associated with that.

We've been working now for the last two years in making sure that Merit had all of its licenses. We have outside consultants. And now we have internal Merit employees in China making sure that we have all of our products registered there. And we're going to register essentially 80% more than we have today. We're only selling 20% to 25% of our products there today. Not all of them are going to sell, but most of them are. And I believe by the time we get into the fourth quarter, we'll be up and running, we'll have inventory on the shelf. It could roll early into next year. So we're going to have that expense this year. I mean, it's there. It's not going away. And it's I think candidly a bold move. But there's so much opportunity and there's so much need for the products that Merit builds that we felt for the relatively short cost - time and cost that it was the right thing to do. And I know Joe Wright's sitting in the room who has that responsibility. And, Joe, speak to that. I mean, it's your gig. You're the guy that's there on the ground. Why don't you address it in your own words?

Yes, so we've been working feverishly on new product renewals. And that's taken most of the time. So we expect to have renewals later this year. As far as new product registrations, we won't have additional items until next year. But that will help accelerate the top line, of course.

Yes, and see, the one thing that that does for us, as I mentioned earlier, is it takes some of our import prices and it takes and almost doubles the revenue we get off that, thereby increasing our gross margins, just on our existing products. It almost doubles the revenue the day that we are the importer versus the way that we're currently doing. And that - most of that will be this year, or at least starting this year. So it's going to have a big impact. Literally that means that our revenues are going to go from $12 million to $25 million day one. So rather than going to the distributor, they come to Merit, then go through the distribution network at almost twice the price.

Okay, Fred, thanks. One other quick follow-up question on China, you alluded to - in some of your prepared comments about a benefit that you all will receive as you realize kind of a higher in-market price. Could you quantify just a - in a general sense the amount of revenue that you all are deriving from China now and maybe kind of describe to us what that might look like as we look out 12 to 18 months?

Okay. Last year, we did $11 million in China through a distributor. We believe that as we take it into our warehouse that that revenue from day one should double. It's almost a double from what we sell it to our current importer for when it gets landed in the country. Once it lands there and it lands at a Merit facility, it will go through some of the same existing distribution channels, but Merit gets the benefit of almost 2X.

And that will start in the fourth quarter we're hoping, to give you this year's number if that's what you were worried about.

Great. That's great, Kent. And then final question, Kent, more of a housekeeping item, EN Snare, that's in your standalone devices revenue segment? Is that correct?

Correct.

Okay, great guys, thanks for time.

Thank you.

Thank you. (Operator Instructions). And our next question comes from the line of Ross Taylor with CL King & Associates. Please go ahead.

Hi. You might've answered this question already, but the $2 million upside in revenue as compared to your internal forecast, could you talk about what product categories or products that came from?

Yes. Well, they're in the - we discussed this, but I'll be happy to go through some of these for you. We were talking about some products like our pressure infuser bag that was up at say 36% last quarter, the year-ago period.

And that's in the standalone business, but like manifold kits is a big contributor. It's up, I don't remember the number. It was like $1.2 million over the prior year, but it - trays are up $900,000 I recall as I looked at the list.

Needles were up 36.4% from a year-ago period. Let's see, what else do we have here? I'm going to go to -- hold on here. I'll give you one. Our Prelude sheath, here's an interesting one, was up 53.4%.

Part of the catheter group.

Yes, that's part of our catheter group. And from the year-ago period. And it grew by over $600,000. A pretty significant --

[Strong].

That's the radial. So that's the one we were talking about earlier when we were talking about the growth in radial procedures. Our SMAK and our MAK, these are vascular access products, up 62%. Our vessel-sizing catheter, a product that's been around a long, long time, up 34%. Even our pericardiocentesis trays, that's been a product in Merit's bag for many, many years, up 24%. So there's some pretty significant -- even our Fount infusion catheter up 32%, so there's a lot of things here. Our VakLok syringe, Merit has a patented VakLok syringe that's used by almost everybody in the world that has an aspiration catheter. That product was up 17%. We - so there's a lot of these things. Infusion bags, 32%. So there's a lot of stuff that's doing very, very well. Here's another one -- Meritrans up 59%, these are kits, so a lot of stuff moving very, very nicely.

Okay. And --

Yeah, it's good.

-- second question, just so I can maybe try to get a better handle on where margins might be going over the next year or two, but if SG&A is going to be up around 25.5% of sales, I mean, does that imply you are going to get better gross margins over time to offset that and protect your operating profit margin? Or do you think there is contraction in the operating profit margin (inaudible) on a sustained basis?

Well, if we're going to have - I think I'll just turn it in the other direction. If we're going to have expansion instead of this trough that we've been in, then that's what we're going to have to do. That's our plan. And so with the products that we're introducing that being higher margin with things like the Laureate that have the ability to produce and get 50% to 60% gross margins on a product that has the capability to do tens of millions of dollars, those products, which we've been investing in now, we've built plant and equipment for them and all of those sorts of things and been expensing that stuff. Now it's time for those things, and we should be growing our gross margin.

Listen, I have - I still believe that given the proper time, and, you know, we set out a plan three years ago or four years ago talking about growing our gross margins at 150 basis points. Remember where we started at 38.3%. And if we go back and we take the ups and downs and this and that, we've exceeded that plan. I still believe that we have an opportunity for a reasonable period of time that I can see to grow our gross margins by 150 basis points a year for several years. This year, we just promised 100 basis points because we went through this trough in this first quarter, but if you look at the promise we've made in the last three years, we've exceeded that. We have exceeded it substantially. So we believe that we will have seen that and that we will protect those operating profits. And very candidly, if we can't, we're not doing our job. We ought to be able to do that. And I believe we can. We've done it in the past. We've proven it.

Okay, that - yes, that's good information. And my last question, I just want to make sure I understand also the $189,000 expense for moving that facility out of the Gulf up to Salt Lake City. Is that kind of one time and it's done? Or are we going to see that again for another quarter?

Yes, no, it's essentially - now it's kind of ongoing until we finish up and commission the facility. It is running. Its clean rooms have been built. But we're not into production, so it will stay in that mode probably through the second quarter. And then starting from that point forward, then it will go into cost of goods.

So it's one-time sort of for SG&A purposes, but not in total because it'll move over to the other part of the statement.

But then what we get to do is we get to produce it. And I mentioned this earlier. Let me give you an example of why this is important to us. If we take a look and as to operating expenses, we can produce profit - or product in Salt Lake City over our Texas facility, our healthcare costs are half, our workmen's compensation is half. We can do all of our distribution out of Salt Lake City. Our utilities are half. So when you take all of - taxes.

Taxes are lower.

Insurance -- I could go on and on and on why Utah -- and we live here -- is probably the most favorable place to do business in the country from a research and development tax point of view. I can give you lots of reasons that moving that here is going to be better for our company in the long run. And the long run is just around the corner, so it's not very far away. So it's - there's a - there's a lot more reasons, not just the weather risk. It's one of them, but there's a lot of reasons why producing that product here - I'll give you an example. We're producing one product here for 10% to 15% below what we were producing there. We just started. We're just into the kind of the pilot plant part of it. I believe that's probably going to end up being we can produce it for 20% less. And almost all of that goes right to the bottom line, or at least goes to the pretax line, right? So there's a lot of reasons as we go down the road and we get this facility up and running, it secures our revenues, it's at lower cost, and it's also closer and easier for us to manage.

There's also more capacity when we get --

And more capacity. So there's lots of reasons why we believe it needs to be here.

For now, it's an investment.

Yes. I know my friends in Texas don't like to hear this, but those are just the facts.

Okay, that's helpful. Thanks very much.

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

Well, again, thank you very much. It's been a long call. We've been on here for a little over an hour. We appreciate your interest in the Company. I hope you're as pleased as I am with the revenues. I hope we've given adequate explanations for the various costs that came into the model, some of them one-time, some of them were settlements. And I hope you really will look at those things and understand them.

As I mentioned, our sales were some $2 million ahead of our internal forecast. We've got a great lineup of products. And now these are not things that will - we're talking about. These are things that are launching. We've got the (inaudible), we've got the Blue Diamond, we have the Impress hydrophilic catheter, we have the Laureate, and more. I'm sure I missed a couple of them. But we have lots of products and opportunities to, including the EN Snare, which is exceeding our expectations and is a great, a best-in-class product.

So we're building a business, we're changing it in terms of some of the technologies and things for the future. We're expanding it geographically. We're making the strategic decisions in terms of cost and security. And they're not easy to make. Someone's going to be mad at you. But they're the decisions that have to be made for the best long-term interest of our employees and our shareholders. So I'm excited about what we're doing. I continue to - I hope you can feel across the airwaves that we've got a great business. And at the same time, and I hate to revel in somebody's misfortune, but believe me when I say that our competitors are really struggling. They've taken their eye off the ball. And they've put it on the tee for us. So we're just going to knock it out of the park.

So we appreciate your interest. We'll look forward to talking to you in the future. And we're available. Kent and I will be available here for whatever period of time if there's any clarifications that you'd like to do.

That being said, we'll go ahead and sign off, wishing you the best and Godspeed. Good night.

Thank you. Ladies and gentlemen, this concludes the Merit Medical First Quarter 2010 Earnings Conference Call. You may now disconnect. Thank you for using ACT Conferencing.