Merit Medical Systems Inc (MMSI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Merit Medical's first-quarter 2011 earnings conference call. During today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions).

I would now like to turn the conference over to Fred Lampropoulos.

Thank you very much and good afternoon, ladies and gentlemen. We are happy to be with you this afternoon on relatively short notice. We are broadcasting from Salt Lake City, where we have assembled in our Boardroom about 30 or so of the senior management team at Merit Medical.

Before we get started I would like to ask Rashelle Perry, our General Counsel, to read our disclaimer.

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 also available on our website.

To the extent any forward-looking statements are made on this call, such statements are made only as of today's date, and we do not assume any obligation to update such statements.

Thanks, Rashelle, I appreciate that. Ladies and gentlemen, again, we are delighted to be with you, and we are very happy to have this opportunity to discuss with you our first-quarter results.

I think it speaks for itself. Clearly we are very excited about our business and the progress that we have made in the first quarter. Let me go over a few of the highlights and maybe add a little color.

As you can see, our revenues were up 28.5%, but I think more importantly, our core business was up 17%. The balance is the addition of the BioSphere revenues. As I've mentioned several times in previous calls, we believe that the BioSphere acquisition was a major strategic opportunity. And we believe that that is one of the factors of pulling through products like microcatheters, guidewires, kits and trays and other things that Merit sells.

So all of the divisions across-the-board had sales increases. So it is not just one particular area, but whether it be our domestic, which was up 24%, our European dealers, European direct, whether it was MCTec, whether it be the sensor systems, wherever they are all aspects of our business are growing dramatically.

In fact, Endotek, which has been a bit of a struggle for us, was up 9% for the quarter, but more importantly, it was up 36% in the month of March. We anticipate that the Endotek division will continue to grow, which will add even more momentum going forward with new product releases and opportunities we see in that particular market.

As we look at our non-GAAP earnings I think you can see that there was $7.9 million or $0.27 a share, up 51% compared to the year-ago quarter. And you can read the numbers. There was still some markup costs net of tax that will be rolling out.

Kent, would you just briefly discuss what we can expect to rollout of that in terms of the inventory markup and the work in process for the balance of the year on the BioSphere?

Certainly, Fred. There is about 84,000 more of still finished goods that hasn't sold from the original inventory we purchased in the acquisition. And there is another $236,000 of work in process that will basically go out through the rest of the year.

So that will be a little bit of a drag, but with these results are coming -- even with that in there that will come off.

I would also like to point out that there are some headwinds in our business. We had an input cost of approximately $350,000 to $400,000 of input cost that reduced our earnings. And this is in the form of increased prices for resins in our plastic.

So even with that we were able to, I think, accomplish a tremendous amount in this quarter. Gross margins were up 370 basis points compared to the year-ago period. And, again, excluding the inventory costs and things that Kent just talked about in the markup, they would have been up 420 basis points.

Income from operations, and this is one I am very, very excited about, were 11. -- almost 12% of sales compared to 9.4%. So as you well know, and one of the criticisms has been is that our return on our income from operations had gone down -- and over the last couple of years. I think what we have done, as you can see from this, that has turned very nicely.

Also, another very interesting point is EBITDA approached about $55 million. Not long ago at the end of the year Kent and I were talking and doing some -- working on our financing, and at that particular point I think we were talking $47 million. So we have had a nice jump in EBITDA. This is the trailing 12 months, which is a very exciting prospect for us.

As we move down, and as I mentioned, we are hitting on essentially all cylinders. And some other great opportunities -- our ASAP catheter is being launched in the United States. We are receiving substantial orders from our dealers in Europe where they have a had a little bit of a head start. And we are excited about the prospects of that particular product.

I got a note today from a physician in upstate New York where he was talking just briefly about a product opportunity and an idea he had. The last line said -- oh, and by the way, we're using your ASAP product and we love it. It was unsolicited, and it is always nice to hear from a customer and to get their comments about how the product is working.

Again, we are just rolling that product out in the United States. It is an extraordinary product, and we look forward to the opportunities that it will bring Merit.

As I mentioned earlier, we have other new products, some of which I am not going to mention because of competitive reasons. But we have a number of new products that we will rollout in the next several weeks. One that I will comment on is our Big60. We have been out doing market preference trials with customers. This is to use on dilatation catheters in the esophagus and in the pulmonary area.

And the comments are terrific. We are already taking orders. And I think were about a week or so from launching that product, maybe 10 days, but it is just in front of us. We are just waiting for the sterilization loads to clear and we are ready to go. Then we have a number of other products that are moving out as well, and we will talk to you about those on our next call, once they are in the marketplace.

We also received, since the last time we talked, at least two approvals for two products in China. I am going to talk about China for a minute, because -- in fact, I will tell you what, Kent, I'm going to let you, so that I don't mistake this. But the essence of it is, is it has grown over 100%. But I would like you to talk about the contribution both in units and in profitability and gross margins.

In analyzing where the sales increase comes from when you have 100% increase, we had 36% of it was total of units. It is a various mix of products. But you just add up the total units compared to the prior-year period a year ago and we had 36% more units sold in China.

And then in addition to that your other 60 something percent comes from price increases, because we have now gone and cut out a significant middleman. We are the master distributor or importer to China, and so we are getting a higher retail price, if you will, or an almost retail price for the product. So our gross margins have moved from mid-40%s to mid 60%s.

Yes, on that business. As we now add these new product lines, and particularly some of our vascular access products that we expect to get approved in the third and fourth quarter, there is going to be an exciting opportunity in China going forward. And we are now using that model to start to develop other territories, so we are looking at Brazil, we're looking at Russia, and we are looking at Hong Kong.

These are situations where we would go in and essentially, over a period of time, we would add those types of models where we come in and are able to better control the outcome. So we are very, very excited about that. And it added about 100 basis points to gross margins just from China. Is that correct, Kent?

So you look at the total gross margin improvement we had of 370 basis points to a year ago, and the two biggest factors, one, is the new BioSphere business. That is a high-margin product we have layered in there. And the other biggest contributor is the China business that has added about 1% for over the whole business on that average. So it is nice to have 100 bips, and that is what it does for us.

A couple of other, I think, highlights and things that are important. In the month of March it was an extraordinary month for Merit. It was an all-time record month, but we delivered $32.7 million of revenues in March, an all-time record for Merit. And of course, it created an all-time record in terms of our earnings for a month, and then added into our quarter.

I think it shows that we have the capacity -- and we did this while reducing inventory and increasing turns. And to be able to produce that much I think is extraordinary. And to be able to lean out the inventory -- I was teasing my staff a little bit earlier saying -- well, maybe we had a little too much inventory. So the way we got out of that is we would just sell.

I think that -- again, going back to the efforts of everybody in this room, it was just an extraordinary quarter. We see the momentum building with the new products and new opportunities going forward. So we are very excited about it.

A couple of other points that I think -- that you will be interested and you can read. But we had talked about in our model for next year -- and that is this year, 2011 -- of moving our SG&A costs, which were rather high, down to about 28% for our yearly model. And we were able to get pretty close to that. But as we moved into March our SG&A costs were about 26%.

So what it allows us to do is to see that what we had talked about in the ability to leverage and get some operating leverage is here we have to perform. We have to be able to execute and do all the things that give us these opportunities.

But what it does is, I think, is to go back and to prove our thesis, the things that we have been talking about for a long time, and it is nice to see it all come to pass.

This is the efforts of the people in this room that these things have all gelled. I think in terms of product development, manufacturing -- and I know some of you -- maybe you don't want me to pat these guys on spending too much time on it, but these are the guys that do the work. And Kent and I are just the front men, but there is so many great players here that help to contribute to this effort. And I want to once again, express my appreciation to them.

A couple of final notes. And that is if you take a look at the press release and you take a look at all the sales groups, I think you will be astounded at our -- at issues like catheter sales, inflation devices, which grew at 19%. Kent, where would that have been without kyphon, because we had --?

It was 19% as well. So kyphon grew 19%. The rest of the business did so combine the two.

Here is the other interesting part. For the last couple of years it has been in those low single digits. We are increasing substantially our capacity, because of the demand that we are seeing in the inflation device business. Which is we are the market leader and we are seeing growth. Part of it is coming out of Europe and the Middle East.

I also should point out we are able to do this even though we had some difficulty. In fact, I estimate we could have added another $0.5 million to $1 million if the unrest in the Middle East hadn't been there, we would have delivered more in sales. But because of Tunisia and other places where we sell in the Middle East, there was some disruption, and continues to be. Despite that we were able to deliver these numbers.

So across-the-board catheters, inflation devices, standalone -- even kits and trays were up 16%. It is not our area of focus, but I think it speaks volumes to Merit's presence in the marketplace and that growth.

As I mentioned previously, Endotek grew at 9%, but grew in excess of 30% in March. I should say that disruption from some of our competitors is affecting a number of these areas. We have been able to take advantage in catheters, in stents, in a number of areas where some of our competitors have stumbled a little bit.

So, ladies and gentlemen, that is the essence of it. I don't know what else I can add to what I think is the best quarter in Merit's history. The key takeaways are 17.2% on the core business.

Let me just add one piece of color to that. Our sensor business was up. It was something we don't talk a lot, but we have a semiconductor company that provides sensors for our digital inflation devices and for blood pressure transducers. And we have a number of OEM customers, and that business has just blossomed, and we believe that it will continue to do so. It is very, very volume sensitive, so we will see gross margins increase as we add volume over in that division.

It is -- again, whether it be an underwater diving watch, whether it be automotive, consumer, industrial or medical, Merit is becoming a place to stop and to know that they are getting high-quality and, maybe more importantly, stability. I think that is the one thing that has stood up is that we have gone through this crisis in this economic downturn, companies are looking for reliable vendors. And I think that Merit has been able to prove that, both in terms of stability and product quality, that we can meet the needs. Aerospace, I can go on and on about those opportunities. We expect it will continue to be a large contributor moving forward.

So I think, Kent, that does it for me. Would you like to add anything?

Yes, I would like to add a couple of comments. One is that I was impressed with some of our international growth, particularly in OEM, and the EU dealers this last quarter. The OEM international is up almost 130% over the prior year and 70% for the EU dealers. So those are two of the areas that really contributed a lot to the growth that we hadn't mentioned.

There is a variety of strong products that we can talk about, both in some of the catheter products and some of the standalone. And some of our traditional products like control syringes were up 40%, because I think China is really adding to that area.

So strong across-the-board, a lot of momentum, a lot of new products. A number of our competitors that are contacting their salesforces and other things that are going on, all of those played to Merit's favor. And we are delighted to have this opportunity to report this first quarter to you.

So I think with that said, Kent, we will go ahead and turn it over -- if the operators there, we will start taking questions.

(Operator Instructions). Larry Solow, CJS Securities.

Good quarter, congratulations. You gave a lot of color there, I appreciate it. Could you maybe just -- you talked about a bunch of -- a couple of new products that recently got approvals and it sounds like -- I imagine maybe you could just give us a little color on some of the approvals that you have gotten over the last one to two years and how they added to the growth this quarter. Because it looks like you are strong across-the-board. Was there some good new product contributions in there?

We got our Laureate guidewire; that is part of this. Our microcatheters, again, this is this pull-through that I'm talking about that delivers the embolic materials. The ASAP, which contributed in Europe, essentially just for the first quarter, but will be a huge contributor going forward.

Let me just think here. Regulatory -- help me out here. We got a couple of new products approved, like I said, in China, but that is going forward. Let's see --.

(inaudible) sheaths (inaudible) radial.

Yes, radial sheaths. It is just -- those are stents that we have had approval on. And so there is a list that is -- I don't want to say it is a mile long, but maybe a half a mile long.

If you had to just ballpark what kind of potential do you think some of these new -- like the ASAP catheter and the Big60, three so five years out, looking out, what kind of sales you think those products can bring?

We believe that the Aspiration Catheter is about $100 million. And I'm looking down at the table here at my Marketing guy, and he says that anything less than 30% or 40% is unacceptable. So there is $30 million to $40 million. I hope he is right. I think he is right, by the way, or we wouldn't have spent the time. By the way, we started developing before he got here, but we wanted to give him something to work on.

When we talk about the Laureate guidewire is a $200 million market out there. I have said in the past that I think in five to seven years is a $50 million to $70 million market.

One of the really exciting growing markets for Merit that is growing in the 30%, 40%, and some parts of this business 50%, when we are talking about radial access and when we are talking about short sheaths for dialysis or standard femoral approach types of introducer sheaths, we are talking about growth, like I said, 35%, 40%, 50% in different segments of that.

We believe that that opportunity will grow to 250,000 units a month from where we are right now, which is about 85,000 to 100,000. So all of our businesses and all of these products are growing.

But there is things, just briefly, if I could. When we introduced the sheath several years ago, it was kind of like a nonevent. No one got very excited about it. I think what we have tried to do is we are just not a one product company. We build out businesses and product lines and sometimes they take five years, or seven years in this case. We have been doing this for a while. But you have to build out, and you can't build all those products and introduce them or they will never get to market, so you pick parts of them.

As an example, in microcatheters we just have an opportunity right now that is basically delivering for UFE and for certain types of embolic materials, but there's a whole neural market, and there's all these other opportunities in the future that we could take a look at.

So there is plenty to go. We haven't reached the end of the opportunity, I can assure you of that. Then in the GI market we are just getting started. We have balloons coming out there. Another $100 million, $150 million market there. So there is lots of stuff on our plate. And we are very patient. We look at everything in the long-term, and I think that has been one of the reasons that if you take a look at Merit over the long-term, I think we have done a nice job of growing the topline. And we're going to do a better job growing the bottom line as well.

You mentioned Endotek. It sounds like the results were sequentially improving through the quarter. I know Boston Scientific had a little issue and they were referring clients to your AERO stent product. Is that still occurring and --?

Yes, it is.

So I imagine that was one of the reasons for this stronger March?

That was part of it. But the other part is new leadership in the sales department in that area, and leadership in the business, and I think just the vision of patients. I know sometimes you guys get a little impatient with us. I still believe that the GI business will be $100 million of opportunity, revenue for Merit. When we are sitting here at $12 million ramped at this particular rate, so that is $88 million to go, and we intend to get there.

I remember when we started in the IR business people scoffed at us and said -- well, geez, this and that. And I think that revenue right now is about $150 million or some number like that.

So we stay in these things for the long run. We pick our fights and we go out and we improve our products and we deliver value to our customers. And so that has been Merit's operational mode for a long time.

Then just last question, if I may. It looks like sequentially your topline grew about 7%, but if you strip out the one-time cost and the amortization of intangibles SG&A was actually down sequentially. So is that something that you feel comfortable -- maybe not continuing to go down, but that we have seen the high levels of SG&A as a percentage of revenues and the trends are more in your favor going forward?

Well, you will recall that when we gave our guidance we used in our model, I think, around 28% for the year. So at 28.2% or 28.4% whatever (multiple speakers) this quarter, then there is more room for us to get some leverage.

As I also mentioned, that in the month of March on those higher sales the SG&A costs were about 26%, give or take. That tells me there is more room. Now, I'm not suggesting we are going to get to 26% for the year. But 28% feels a lot more comfortable when we made the prediction when it was 30.5% or even higher than that. So it is nice to see it move in that direction. Is there more leverage there? Yes.

You will also note, though, that R&D expenses were up slightly, because, again, it takes more money to develop more of these advanced products that give you higher gross margins. So I don't expect that that will go up a whole lot more. But the fact of the matter is -- well, wait a second, Kent, correct me.

It actually will when the trials crank up.

That's correct. So it will as a percentage of sales. But, listen, if we are going to grow the business to $1 billion, that is what we have to do. We are going to invest in R&D. And I think, historically we have been very efficient with our R&D dollars, but it is now up -- it takes a little bit more to do some of these advanced products.

Just to clarify, the SG&A actually as a percentage of sales on a non-GAAP basis was actually less than 28%, right, or that 28% number is a GAAP number you are referring to?

It isn't a lot of difference. One is 28.4% for the GAAP and 28.3% for the non-GAAP.

But if you take out the (multiple speakers).

If you take out the amortization (multiple speakers).

The amortization, right. (multiple speakers).

That's true. We didn't --.

We didn't break that out, but the answer is, yes, it is a lot lower.

Because if you take out the amortization you are more like 26.5% versus like 29% even last quarter.

Yes, yes.

You've got a lot of leverage there. Okay, great. Thanks a lot, guys. I appreciate it.

Tom Gunderson, Piper Jaffray.

I just have one area of questions I wanted to ask on BioSphere. If I look back at BioSphere's previous sales, they were down last Q1 by 3% or 4% -- more in the US and made up some of it OUS. The same thing happened, they were down in Q2. You are up nicely over last year's Q1, and I'm just wondering if you could give us a little color as to where that is coming from? Is it -- are you adding more radiologists? Are you focusing on the current radiologists and getting them to do more procedures? Did you raise price? Where is it coming from?

Let me answer the question. We did not raise the price. And, by the way, I think my personal opinion is it is actually even more extraordinary, because whenever you go through a transition, some of which was replacing dealers and people stockpiling because they might -- in the previous quarters, I think it is even more extraordinary.

I think it is the effort of our salesforce. I think it is maintaining the relationships we have had. And I think there is more to this. As we move forward on the high quality study down the road, we're going to see higher revenues here.

I think the other thing that comes from is there was a lot of concentration on UFEs in the past, and there still is. It is still the major portion of it. But there are other areas where the embolic is used, and I think our salesforce, just simply having a larger footprint, more sales guys out there, is going to help his business to grow.

But I have Jim Kelly here, who is the Product Manager, and came to us from BioSphere. So Jim, do you want to add any color to that?

I would just emphasize the fact that I do think a bigger sales footprint helps a lot. There has been some nice synergies with the Merit product line and the BioSphere embolic product lines as well. And certainly having the lift from getting the trial approved has really helped QuadraSphere in the United States and HepaSphere abroad.

I think candidly the transition of the business has gone very well. It hasn't been perfect, but I think we all get along pretty well. These guys have done a great job. I think we maintained our regulatory part of that out in Massachusetts, and so I think there is a lot of continuity here. And I think about as well as you could have done.

We replaced some distributors where we are direct into foreign countries as well.

Yes, that helped. That is another part, Mike, in Europe where we had distributors. But even then, it is a struggle. So we are actually doing better than I think the number actually shows. So that is our color on it.

Great, thank you very much.

Drew Jones, Stephens Inc.

Congratulations everybody. A question for you on the share gains. You guys talked a lot about share gains last year. It is clear that it's starting to manifest in the P&L. When we think about the disruptions that are going on at Cordis, Medtronic, Boston Sci, is there potential for those disruptions to have as big of an impact as those share gains from last year?

Well, I think that is part of what we are seeing. Clearly in the first quarter we saw that in our Endotek division. We are seeing it with catheters. We are seeing it with a lot of our products. I think we could see more.

Now remember last year we had that one issue with -- in the fluid management area. And that has pretty well settled down, so we are not getting a lot more. We had a pretty substantial opportunity there that we took advantage of. But I think we are seeing it across the board with these other companies. And I think we will continue to see it.

You have read what is going on. And whenever you have that disruption, it is going to -- if you are in the right place and you have the right products and service, you're going to have an opportunity. We think we are seeing part of that.

Switching to China real quickly, when we think about the approvals that are coming through there, how quickly does it take for that to transition into sales for you guys? What is still in the pipeline? What has the biggest potential for impact this year and next?

Well, I think, first of all, we are only selling about 20% of our products over there. We take a look at our entire interventional radiology line, things like the ASAP catheter, things like the Laureate -- so you take a look at all of these products that we have and there is an extraordinary opportunity there.

I have said in few calls ago or maybe even the last call, that I believe there is $100 million worth of revenue opportunity in China in the next four or five years. So if we take a look at $18 million, $20 million this year, that is pretty substantial growth over the next three or four years. Compounded it is likely to grow at 75 -- I think -- and correct me -- but I think it will grow 100% over the year-ago period. So that is pretty substantial. Now we are not going to grow at 100% clearly. But there is a lot of opportunity here in that marketplace.

Okay, and then last one, can you give us an update on Chinese infrastructure, where we stand, what still needs to be added this year? And how is profitability tracking over there?

In general the infrastructure that we have in terms of our distribution and warehouse -- I will tell you what I'm going to do. I am going to have Joe Wright, who has grown that business 100%, speak to it. Because he is the guy that -- I always like to have him when -- just put their feet to the fire here.

So, Joe, the question is about infrastructure, what we are doing. And maybe you can just address a little bit about Hong Kong.

Well, we have an administrative office in Beijing where we are adding employees. We expect to nearly double our headcount in China this year. So that is some investment yet to come. We are also looking at regional expansion in Hong Kong. So having a better support structure there for clinical and marketing support for not just the Mainland, but also Southeast Asia region in general. So those are the two biggest areas of investment, I think, this year.

I think of note though, despite the infrastructure and these additional guys, we are tracking well ahead of our profit forecast, even with this additional expense. So we are tracking well have on our initial projections. I think it has turned out to be a jewel, very candidly. And I think we haven't polished yet, so there is plenty of room to go here.

Revenues and profits are well ahead, as he has already stated. And most of the additions we are having are additional salespeople. So the basic infrastructure for administration and regulatory and management are already there -- and distribution. So what we are interested in is getting better market penetration regionally in the country, and getting better depth with our existing products. And then as Fred has already mentioned, as we bring on the new ones that will be starting to come now almost every month, then we will be able to get breadth of product in there.

With 80% of our products that still need to be sold, we needed to have more of a salesforce, and we needed to train them in advance. Fortunately for us, the sales growth we are seeing and the revenue that that is generating and the gross margins is offsetting the cost. So you're not seeing much of that come down to the SG&A line because of the sales growth and because of the increase in margins. So you are seeing it as growth in profits in margins and we are seeing it as opportunities as we move down the road.

Last one, so with all that momentum and the solid 1Q, any update to guidance at this point?

We don't do that. We never -- we haven't for many, many years. That is up to you guys. I would say this, and I think Kent alluded to it, and that is you do have these studies that are going to add $2.5 million, $3 million or so this year in expenses. And we had a very good quarter. So we do have some of those expenses. You could have the headwinds of resin costs, depending on what oil prices do. You have all those issues that we have to face, but we faced them pretty well in the first quarter.

But it is too early. If we saw something significant where -- it is one of the reasons I point out the $32.6 million, because if you look at that, that is $400 million. But we're not going to have that every month. But it shows you where the opportunity and shows you where the leverage is. And I think that is what we are trying to point out today. It is there.

But we've got -- one, as my controller said today, is one quarter just not a year make. It is a great quarter, and we have a lot of opportunity, but we still have -- that is just the first quarter of the game, and we are ahead. Now we will see -- but we've got to play all four quarters here.

Thanks, guys.

Shawn Bevec, SIG.

A couple of questions here. Would you say that the $0.27 that you put up in the quarter is the low water mark for the year?

I wouldn't say anything like that.

Okay.

I'm not going to -- that is up to you guys to do. I have given you the numbers and I have talked about our growth, but I'm not going to prognosticate other numbers. I am not going to do any of that.

That gets into my second question. Do you think the $33 million in March, do you think that is sustainable?

(multiple speakers). No, it is not sustainable every month. Remember we had an extra day, I think, in the month of (multiple speakers).

Two extra days.

Two extra days in the month. So that was part of it. But you know, it all kind of evens out over the year. You may get one period where you get one extra day or two like this one. So that was part of it.

But I think what it does show is that we have the capacity. It shows that we have the demand for our products. And I think that with the momentum we have there is great opportunity. But, again, oil prices at $150 or something like that, that puts -- input cost, other types of disruptions.

I have been in the business too long. And it is a great quarter and I am excited about it, but again, I've got to get up in the morning and come here tomorrow and face all the issues. And so we are not ready to change anything at this point.

But are we ever going to hit $400 million, and are we going to be ramping at those areas? There are opportunities in growth. Merit has never had a better opportunity than we see today. But I just can't foresee all of the other issues that we may have to face.

Okay, and then looking at China, how much of your portfolio is currently being sold in China today? And the increases that you're seeing, is that coming from new customers being signed or older customers just increasing uptake?

First of all, only about 20% of our products are being sold there. The other 80%, we will receive approvals for over the next four quarters. We have received two in the last couple of weeks. And so we know that the system is working, albeit slow. But we expect that we will see it continue.

The unit growth we have discussed. But Kent -- that we are seeing both unit and margin growth.

Yes.

So we are seeing higher units. So it is not just -- it is not on the same thing as getting more money for it. We are up, I think, 36%, Kent, (multiple speakers).

I have 36% in units. But to try and state it a different way, we are adding distribution depth. In other words, we've got newer distributors and subdistributors we are adding to the mix. So we are finding new customers in China. I will say it that way. And it is increasing pretty dramatically. The estimate we hear is 20% a year growth in the number of patients being treated in China.

So once you sign up with customers -- so we are seeing double growth. It is both additional sales through existing distribution and expanding the distribution to new customers.

Okay, and then a last quick one. What was your cash from ops in the quarter, and free cash flow?

What was the cash from ops? It was about $4.6 million. We saw quite a bit of increases in our receivables due to the sales at the year-end. In fact -- quarter end. I was going to add a comment to that. We see often at quarter end a bolus or an extra amount of sales through the quarter at the end from distributors and from OEM customers often.

So there is a bigger push there and that bulked up the receivables. And the prepays are a little high. But we are excited about what the EBITDA is doing and where the cash flow is going to continue as we go forward.

Okay, thank you, guys.

James Sidoti, Sidoti & Company.

So, Fred, you don't want to update guidance, but can you at least tell us was there anything in the first quarter that was a one-time or something that maybe you pulled in from the second quarter?

No.

No.

So it was basically a good quarter on all businesses, but no extraordinary items?

No, there were not any extraordinary items, just the quarter itself.

Now you talked about this trial, this $3 million on the trial, were any of those costs in the first quarter?

Yes, of course there are. (multiple speakers). There are costs. There is some of the trial, but remember we have the overhead to support it with the clinical people and all the stuff that goes along with that in that regulatory part of it. That is all there. There are some cost expenses of travel, and we are signing up some people, but we will see more of that going forward.

Remember, this is what we talked about when we did the deal that there is going to be $10 million over about three years, and we broke it out year-over-year. But, again, our belief is that those trials are going to help the visibility of all Merit products. So there is -- not only do you have the trial, but hopefully we will get them to use our catheters and these other -- so there are other things that come through this pull-through that we're talking about in terms of dollars and opportunity. That pull-through is a big deal.

There were some expenses from printing and preparation some legal documentation. There is [true]. But it is relatively small compared to the enrollment process that actually starts, we believe, this month in April.

So you expect the costs related to the trial to jump in the second and third quarters?

Yes.

And fourth. And for the next -- it will run through until it is done. Yes.

So is that up $0.25 million or --?

It is about -- I think this year we estimated about $2.5 million.

No, but the change from the first to the second quarter, is that $0.5 million up or --?

You know what, we will go through it. I don't have the numbers in front of me. (multiple speakers). We will get back to you on that one.

Okay. Then, finally, can you just remind me how many salespeople you have now selling the BioSphere and how many they had when you (multiple speakers)?

They were about 22, I think -- 24. And we have about 100 plus clinical, and that doesn't include regional managers who help and support that. So I would say just a ballpark, 22. And when you add all the clinicals and regionals and sales guys probably 150, when you add all of that together worldwide.

Now out of that 150, how do you think were up to speed in this quarter?

This product is a lot more difficult and requires a lot more training and understanding than I think -- not that we anticipate it, but it is just -- it is not -- you just to pick it up and walk in and say, here you go, what do you think of this? It is a serious business. The patients are seriously ill and this is the gold standard.

So it is a constant ongoing program of training, reinforcement and that sort of thing. You have to understand how it is prepared and you have to understand how it is delivered. And so there is always a lot of work in here, and there will continue to be.

I think there is a learning curve that there is still a continuum they are on here, and they're getting better at it. But it is also a little longer sales cycles than some of our products. So the decision wasn't made really quick on some of this stuff.

There is still these other issues out there that will be interesting to see how they play out in terms of disruptions from other distribution agreements and sales of other companies and all those sorts of things. So I don't -- we don't know how those all play out. But in the past disruptions have generally played pretty well to Merit's favor.

But on the BioSphere side, it sounds like that that number is going to continue to improve pretty quickly as those --.

We certainly hope so.

Okay, all right, thank you.

Pardon me everybody, I apologize. I am experiencing technical difficulties. Bear with me please.

See, another disruption, Jim. On that subject, listen, disruption is one thing and execution and the ability to take advantage is quite another. So I think, again, that speaks volumes to our folks who can respond. And I think it speaks volumes to the ability of Merit to gather intelligence from the battlefield and turn it into both a tactical and strategic advantage.

So there is a lot going on here. And that goes back to that salesforce and our product managers and clinical folks. There's a lot of stuff coming through here every day about what is going on in the marketplace.

Know your markets, have the right products, and make the right relationships, and we are doing well on all of them.

And be able to move on a dime.

On the kyphon product up -- I think you said 19%, Kent. Is that the next-generation version or is that the --?

No, no, that is the old core product we have been working with.

This is the old core product. So that is something that we are not counting on and so when we get it, it is a nice little addition.

Okay, that that is not something we should model in?

No, I wouldn't expect it to stay -- but it could, it is just we don't have very good visibility often into the future very far. We can see a quarter maybe. They put some orders into this quarter. But the ones that can really count on is the standard business. That is what I'm excited about, and that is 19%, and that is real solid.

Remember, they're going to add the Big60 to that. I guess that will be in the Endotek, but we will measure it in both sides. But that is a big deal, Jim.

Yes, the Big60 -- and let me tell you why it is a big deal. If you take the competitor products you have to pump them up and you have to pump them down. With our product you just take it, you inflate, and you disengage, and you can bring that balloon down, and physicians love that.

Remember, you've got this balloon, this huge balloon stuck in your esophagus, and the faster you can get that down after you have accomplished what you want to do with that stricture, the better off it is for the physician and the patient, and getting all this stuff done so they can move down the road.

It is a big deal. Every place we have gone and everywhere we have used the device, people say they can't wait to get their hands on it. So we are very excited about that.

So you expect that to pull-through some of your stents as well?

Yes, I think all of this works together. We have built the business on all these add-ons and building a business and bundling and all those sorts of things.

I think the other thing it will do is it will sell a lot of our new esophageal balloons that will be coming out here in the third quarter or late second quarter -- I guess third quarter is probably the best thing -- in Europe and then in the US shortly after that.

But you can bundle them together, and we are going to have an advantage. We think we have a premium product. And so it is going to be fun to do that, bundle them together.

All right, thanks, Fred.

Okay, are we back there with our operator?

If you can hear me, we are still trying to figure out our technical difficulties. I apologize.

Well, let's do this, because I am sure that we have a lot of calls that want to come. We have been on for 45 minutes. Let me just say that rather than make you wait there, folks, Kent and I are available. We will be in our office. We will answer your questions.

We apologize for the technical difficulties. Amber, I'm going to ask you to find out what that was, because I don't like to have technical difficulties.

But we will go ahead and be here for the next couple of hours to take your calls. We appreciate your interest. We appreciate your patience with us. And we look forward to reporting against you in the very near future. That being said, thank you again for your interest and participation. We will sign off now from the Valley of the Great Salt Lake, and the greatest snow on earth in Salt Lake City. Good evening.